Is the plunging ITM Power share price a buying opportunity?

The ITM Power share price has fallen over a third in the past year. Our writer still won’t buy it for his portfolio — here he explains his thinking.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Light bulb with growing tree.

Image source: Getty Images

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.

Next move

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Woman using laptop and working from home
Investing Articles

2 top stocks to buy with dividends yielding more than 3%

When I’m looking for stocks to buy, big dividends can be attractive. On my radar right now is a FTSE…

Read more »

man in shirt using computer and smiling while working in the office
Investing Articles

2 FTSE 250 high-dividend stocks I’d buy for passive income!

Buying shares with above-average dividend yields can have a spectacular effect on long-term passive income. Here are two high-dividend stocks…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Should I buy this dirt-cheap penny stock for growth and returns?

This Fool delves deeper into a penny stock that could be primed to grow and provide lucrative returns in the…

Read more »

Fans of Warren Buffett taking his photo
Investing Articles

3 points I’ve learned from Warren Buffett’s whopping $43.8bn loss

Jon Smith shares some of his takeaways after seeing the Q2 reported loss for Warren Buffett's company, Berkshire Hathaway.

Read more »

Happy couple showing relief at news
Investing Articles

The Aviva share price is climbing. Here’s why I’d buy more

After what seems like years of going nowhere, the Aviva share price is finally showing signs of life. I take…

Read more »

Happy young plus size woman sitting at kitchen table and watching tv series on tablet computer
Investing Articles

This is one of the best shares to buy for juicy dividends!

Jabran Khan is hunting for the best shares to buy. This commodities business offers an enticing dividend yield to boost…

Read more »

Young female analyst working at her desk in the office
Investing Articles

Can I trust Rio Tinto’s 10.3% dividend yield?

Rio Tinto offers one of the biggest dividend yields on the FTSE 100 today. But does this make it a…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Lithium prices skyrocket: 2 UK shares I’d buy to capitalise 

Lithium has quickly become the most in-demand metal in 2022. I am looking at two UK shares in the EV…

Read more »