Could I double my money if I buy at this ITM Power share price?

Jefferies reiterated a huge ITM Power share price target of 800p this month. Dan Appleby analyses whether this opportunity is too good to miss.

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The ITM Power (LSE: ITM) share price stands at 239p as I write this article. However, consensus analyst expectations point to a share price of 586p, or an expected return of 145%. What’s more, Jefferies just reiterated their share price target of 800p. To put this into context, if I bought £1,000 of ITM Power stock today and sold at 800p, that would turn my investment into £3,347. Wow!

They might be wrong, but City analysts certainly think I’d double my money buying ITM stock. So, should I buy?

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The bull case

I can see the appeal in ITM Power as a company. On its website, it says that it’s a world leader in ‘green hydrogen’ technology. That’s quite a statement, and enough to get investors interested. In particular, the company develops equipment to convert renewable energy into a net-zero fuel. This would reduce the need for fossil fuels, and therefore result in lower carbon emissions and improve air quality.

In a study by PwC, it said green hydrogen “holds significant promise in meeting the world’s future energy demands”. This sounds promising, and a good sector tailwind for ITM Power.

In support of the bullish share price expectations, analysts are also forecasting spectacular revenue growth in the years ahead. For the fiscal year ending 30 April 2022, revenue is expected to be £22m. In fiscal 2023 and 2024, revenue is forecast to increase to £66m and £133m, respectively. If achieved, this would be three consecutive years of triple-digit revenue growth. No wonder analysts expect the ITM Power share price to surge.

Risks to consider

ITM Power released its half-year report ending 31 October last week. However, revenue only came in at £4.2m. Management said this was “reflecting [the] impact of Covid-19 issues”. It means the company needs to generate £17.8m of revenue in the second half of its fiscal year to reach analysts’ forecasts. To my mind, this looks to be a difficult ask.

I also note that PwC said “the economics of green hydrogen are challenging today, primarily because the underlying costs and availability of renewable energy sources vary widely”.

On this note, ITM Power is still heavily loss-making. In the half-year report, the company made a gross loss of £2.6m on the £4.2m in revenue it generated. And even though revenue forecasts look fantastic, ITM Power isn’t expected to become profitable for at least the next three years. This does heighten the risk of any investment. However, the company has £164.2m of cash on the balance sheet after an equity raise in 2021, so there’s enough of a cushion to make up for these losses as it stands.

Should I buy at this ITM Power share price?

It comes down to valuation for me. As the company doesn’t make any profit, I can’t value the shares on a price-to-earnings basis. On a forward price-to-sales ratio though, the shares are rated on a multiple of 60. This will fall considerably, of course, if the revenue forecasts are met. However, the current valuation is pricing in a lot of success, and there’s no guarantee it will reach its revenue goals.

So, although City analysts expect the price to double, I’m not convinced. There are too many risks for me to invest at this stage. I’ll revisit the stock when I see more evidence of revenue growth.

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Dan Appleby 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.

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.

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