Deep dive: can the crumbling ITM Power share price recover?

The ITM Power share price has more than than halved in a year. Christopher Ruane looks at what might come next — and whether he should buy.

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Hydrogen energy specialist ITM Power (LSE: ITM) is one of a number of so-called green energy shares that have attracted a lot of attention among UK investors in recent years. But after losing 57% in the past year, will the ITM Power share price keep disappointing investors? Or could the current price offer a buying opportunity for my portfolio?

Thematic investing and green energy

The enthusiasm for green energy shares is an example of what is known as thematic investing. That is when investors land on a big theme that they think will do well in future, for example because of shifts in human behaviour or the economy. Then they look at individual companies within that area that might benefit from it.

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Green energy is a big theme at the moment and I expect that to become even more the case over time. A rising global population, increasing demand for energy, and concern about the environmental impact of fossil fuels means that both governments and investors see significant opportunities when it comes to green energy.

Green energy investment concerns

I am wary, though. I think environmental damage could be tackled by reducing energy consumption as well as moving to new forms of energy generation. If that happens, it could hurt demand and the future economics of energy, including green energy. My bigger concern from an investment perspective is that different people have wildly different views on what constitutes “green energy”. For example, its low carbon footprint means many people regard nuclear power as green energy. Due to environmental catastrophes such as Fukushima, I do not see nuclear power as green at all.

Over time, if some technologies come to be seen as more or less green, that could change their popularity with investors. Right now, hydrogen energy shares like ITM benefit from plugging into investor perceptions about greenness. But if alternative technologies appear to be environmentally friendlier, that could change the amount of money chasing hydrogen energy shares – and drive their prices down. On the other hand, if hydrogen gets a bigger role in meeting world energy needs, it could be positive news for shares of pioneers like ITM Power.

Why has the ITM Power share price collapsed?

Although ITM came to prominence a couple of years ago when interest in its technology soared, it has actually been listed on the London market for 18 years already. The sharp increase in share price seen in 2020 was not the first time shareholders have experienced such a sudden price surge.

Back in 2006, for example, the ITM Power share price reached £3.36 at one point. That is actually higher than the price today.

After the 2006 surge, the ITM Power share price fell back. The company spent over a decade trading as a penny share. It was not until 2020 that it reached its old price level again. So, if I had bought ITM Power shares amid investor enthusiasm at their peak in 2006, I would have had to wait 14 years just to be able to sell them without making a loss.

After a long wait, the shares not only scaled their old heights but actually reached new ones. That was last January. Since then, though, they have lost 60% of their value. Partly that reflects a consequence of their previous success. Management took advantage of an attractive share price to raise more capital by issuing new shares. That has the effect of diluting existing shareholders. I think this move can make sense to improve a company’s liquidity. But it means a shareholder ends up with less of the company than before – and there is a risk ITM will have more rights issues in future if it wants to boost liquidity. That could damage the share price. Currently there are around 613m ITM Power shares in issue. Five years ago, that number was 222m. That is considerable dilution.

But I think the main reason the ITM Power share price has tumbled is valuation concerns. Even now after a big fall, the company commands a market capitalisation of £1.6bn. That is a very large number compared to revenues.

ITM Power valuation

In its interim results last month, the company reported revenue of £4.1m and a loss for the six months in question of £15.4m. In itself, I do not find that surprising. The company is continuing to scale up and commercialise its operations. That often involves a company making losses before hopefully it turns into the black. Revenue showed a big increase, as it had been only £178,000 in the equivalent prior period. The company had more than four times as much contracted work in hand last month, in terms of power output, as it did a year beforehand. Indeed, it is so bullish it expects to start building a second factory this year. These are positive signs for the business, in my view.

But while the travel of direction looks encouraging for revenue at least, it remains miniscule compared to the company’s market capitalisation. On top of that, the long-term profitability for ITM Power is hard to gauge. For now it remains loss-making. If that continues to be the case in coming years, it may need to dilute shareholders further to raise more funds.

Am I investing?

It may be possible to justify the current ITM Power valuation. If sales grow strongly and the company becomes profitable, it could make sense. In fact, sustained positive commercial momentum could end up justifying a higher ITM Power share price than the one today. So, with the right future news stream, I do think that the ITM Power share price could recover fully to its former level.

The problem is that such news might never happen. The company has already been in existence for a couple of decades, so it is not exactly new. Given the emergence of green energy as an investment theme, I expect more competition for ITM’s technology in coming years. That could threaten the company’s long-term profitability. I see the ITM Power share price as valued for a high level of future success, but it is far from clear that such a scale of success will ever arrive. For that reason, I continue to avoid buying ITM Power shares for my portfolio.

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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.

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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