Can the Ceres Power share price recover?

Is it possible the crumbling Ceres Power share price could get back to its old levels? Our writer considers if it can and his own next move.

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Ceres was the Roman goddess of agriculture. But fuel cell specialist Ceres Power (LSE: CWR) seems not to have been blessed by the gods lately. The Ceres Power share price has withered on the vine, falling 58% over the past year.

Below I consider whether the share price could soar to its old heights again and what that might mean for my portfolio.

What has happened to the Ceres Power share price?

The sort of downward movement we have seen in the Ceres Power share price can usually happen for a couple of main reasons. The business performance can disappoint, or shareholders simply reassess their previous valuation of a firm.

When it comes to business performance, I think Ceres has shown positive momentum. In a trading update this month, the company maintained its guidance for the year. It said that revenue and other income were expected to come in at £31.5 million, a 44% increase from the previous 12 months. The pipeline of commercial opportunities was described as “strong”. The company’s strategic partner, Doosan, continues to roll out Ceres’ technology.

So, if business is going well, why has the share price fallen? I think it is a reaction to what was perceived as a frothy valuation. Even now after the fall, Ceres commands a market capitalisation of over £1bn. At around 33 times last year’s revenue and other income, that does not strike me as cheap. Meanwhile, although it has ample liquidity, Ceres continues to make a loss. In its first half, the company reported an operating loss of £7.6m.

Possible drivers for recovery

So, investors seem to have marked Ceres down from its previous level as the firm’s financial outlook has not been good enough to justify it.

If revenue growth accelerates sharply, that could be a trigger for a higher share price. But given the share price falls already seen against a backdrop of strong revenue growth, I would be surprised if Ceres can add the sort of sales necessary to spark a large share price jump. As the company gets bigger, it will be harder for it to keep achieving the same sorts of sales increases in percentage terms.

Another possible trigger for the shares to move up could be a move to profitability. If the company starts turning a sizeable profit, that will validate its business model and could excite investors. But I doubt that will happen in the next several years. The company remains in a growth phase and often that includes burning cash. Indeed, I see the continued need to maintain liquidity as a risk. The loss-making company may seek to boost its cash levels in future with a rights issue. That could dilute existing shareholders.

My next move

So, although I see some possible drivers to justify a share price recovery at Ceres, I do not expect it to happen in the short term. The company continues to command a hefty price tag relative to its revenue. I will not be adding it to my portfolio.

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 assessed. 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.

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