For a company focussed on energy, shares in ITM Power (LSE: ITM) have indeed been moving energetically — but in the wrong direction. The ITM Power share price has tumbled 36% over the past year, at the time of writing this article earlier today.
Could this present a buying opportunity for my portfolio? I don’t think so – and here is why.
Promising business momentum
ITM’s hydrogen energy technology has attracted a lot of attention. The hunt is on globally for alternative sources of energy. Hydrogen is one of the options that may have a bright future. ITM’s years of research in the field mean that it is a leading contender in the race to commercialise and scale hydrogen energy technology. It has one factory operational in the north of England and has acquired a site for a second one in the UK. It is also planning to open a factory overseas.
As well as growing supply, ITM has been working to increase demand. It has recruited some executives with long experience in UK industry as part of its sales push. I think that should show results in the form of revenue growth in the coming couple of years. For the first six months of its year, the company reported revenue of £4.1m compared to just £0.2m in the equivalent prior year period. While the company remains loss-making, it had cash of £167m at the end of October and raised £242m of new money in November. So I think ITM has ample liquidity to sustain losses for a while.
ITM Power share price valuation concerns
Given the strong business momentum and opportunity for further sales growth in coming months, why am I bearish on the idea of adding ITM Power to my portfolio?
In a word: valuation. Currently, ITM Power has a market capitalisation of over £2bn. While revenue has been growing rapidly, it remains small. The company has been losing money for years. As it expands its production capacities, capital expenditure could push it to larger not smaller losses. Meanwhile, to boost liquidity in the face of such losses, the company has repeatedly diluted shareholders. The £242m raised in November is an example. While the cash injection is good for the company’s balance sheet, it came at the expense of diluting existing shareholders. I see a continued risk that, if the company keeps reporting losses, in future it may further dilute shareholders to raise more funds.
On top of that, although the company’s technology is promising and has attracted interest from large customers, in itself that does not mean that the future is bright. In a young industry, competition and consolidation can lead to early players losing their position. ITM Power has spent years developing its technology, but a deep-pocketed rival could develop similar products. That could stall ITM’s revenue growth, or lead it into a costly price war.
Given the risks involved and the limited scale of the commercial progress the company has made so far, I think £2bn is too high a valuation. For that reason, I won’t be buying ITM shares for my portfolio at the current price.