Is ITM Power a ‘buy’ at the current share price?

ITM Power’s share price has taken a big hit over the last year. Edward Sheldon looks at whether now is the time to buy the stock.

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ITM Power (LSE: ITM) shares are a popular investment at the moment. Last week, ITM was one of the most traded stocks on Hargreaves Lansdown’s platform.

Should I buy ITM shares for my own portfolio? Let’s take a look at the investment case.

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ITM Power shares: the bull case

I can see why UK investors are bullish on ITM Power right now. For starters, the company – which specialises in hydrogen energy solutions – operates in a high-growth industry.

According to Energy Monitor, demand for green hydrogen and its derivatives is expected to grow “ten-fold” between now and 2050. This industry growth should provide powerful tailwinds for ITM Power.

Secondly, revenues are projected to explode in the years ahead. For the year ended 30 April 2021, ITM posted revenue of £4.3m. For the year ending 30 April 2022 however, analysts expect revenue to come in at £22.8m. That would represent a 430% increase – a very impressive level of growth.

Third, ITM has already signed deals with a number of major players in the energy industry, including Shell, Snam, Linde, and Anglo American. These deals suggest that the company has some top-notch technology.

Finally, the company is getting some positive coverage from brokers. In November, Jefferies initiated coverage of the stock with a price target of 800p. That’s roughly 125% above the current share price. Jefferies also named ITM as a top pick for 2022.

Risks to the share price

However, I have a few concerns in relation to the renewable energy stock. One is the fact that the company is not expected to be profitable for a number of years. This adds a considerable level of risk to the investment case. We’ve seen recently that unprofitable companies tend to be hit hard when there’s a market sell-off.

Another risk is the company could miss analysts’ forecasts. As I mentioned earlier, analysts expect revenue of £22.8m for this financial year. Yet revenue in the first half of the year was only £4.1m. So the group needs to have a huge H2.

It’s worth noting that when I covered ITM last March, analysts were expecting revenue of £6.2m for that financial year. The fact that the top line came in at £4.1m – over 30% below forecasts – is a bit concerning, in my view.

Then there’s the valuation. ITM Power doesn’t have a price-to-earnings ratio because it doesn’t have any earnings. But it does have a price-to-sales ratio and that’s a whopping 96 at the current share price of 356p. That seems very high, to my mind. At that valuation, there’s no margin of safety at all. If future growth is disappointing, I’d expect the stock to fall significantly.

Should I buy ITM Power shares?

Weighing everything up, I don’t see ITM Power as a buy for my portfolio at the current share price. To my mind, the valuation is too high.

All things considered, I think there are much better stocks to buy today.

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Edward Sheldon owns shares in Hargreaves Lansdown. The Motley Fool UK has recommended Hargreaves Lansdown. 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.

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