Up 66% in days! Should I act on the ITM share price?

The ITM Power share price has surged two thirds in just over a fortnight. Our writer explains his next move on the stock.

| 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

Hydrogen energy specialist ITM Power (LSE: ITM) has been disappointing for shareholders over the past year, losing 14% of their value. But in the past fortnight or so, the shares have soared by 66%.

What is going on with the ITM Power share price?

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

No obvious news flow

There is no obvious business reason for the share price surge that I can see. The company has not announced any big business developments or contract wins over the past few weeks. The last such news came in late January, with the sale of an electrolyser for a power station in Norway.

Nor was there any notable director purchases of shares lately, although there have been some small purchases through an employee share incentive scheme. The last substantial director buys of ITM Power shares on the open market were last year.

So I reckon the most likely explanation for the surge in the ITM Power share price over the past couple of weeks is that energy security concerns from the war in Ukraine have led investors to put money into possible alternative energy sources. As the Norwegian sale demonstrates, ITM Power could be seen as being able to supply an alternative to oil and gas.

Is the ITM Power share price surge justified?

If that is indeed the reason for the price surge, it seems pretty speculative to me. After all, ITM Power’s business looks pretty much the same as it did last month. While there may be an increase in demand for hydrogen energy in future, I think that was already priced into the share price. Its whole business model has relied on increased future adoption of hydrogen energy by its target customer base, after all.

A 66% increase is not a small boost. It suggests a radical revaluation of a company’s business prospects. But I already felt the share price was hard to justify before the surge. Now, the loss-making company has a market capitalisation of £2.3bn. But last year it only had sales revenues of £4.3m and it reported losses of £27.7m. To me, the price already looked stretched before the latest move up. It looks even more overvalued now.

My next move

A 66% increase in a couple of weeks could offer an incredible return for a shareholder. But I am an investor, not a speculator. So I do not try to time the market or jump in and out of shares on a short-term basis expecting a share price swing.

Instead, I try to find companies with proven cash generative business models that are trading at attractive valuations. From a positive perspective, ITM Power does have promising technology in an industry that might see a demand boom in coming years. That could help it boost its revenues. Economies of scale might turn its sizeable annual loss into a profit.

For that to happen, though, a lot needs to go right. Given its small revenues, largely unproven commercial strategy and lack of profitability, I think the company’s market capitalisation is too high to justify. What goes up quickly can sometimes come back down just as fast. Despite the surging share price, I will not be buying ITM for my portfolio.

Our 5 Top Shares for the New “Green Industrial Revolution"

It was released in November 2020, and make no mistake:

It’s happening.

The UK Government’s 10-point plan for a new “Green Industrial Revolution.”

PriceWaterhouse Coopers believes this trend will cost £400billion…

…That’s just here in Britain over the next 10 years.

Worldwide, the Green Industrial Revolution could be worth TRILLIONS.

It’s why I’m urging all investors to read this special presentation carefully, and learn how you can uncover the 5 companies that we believe are poised to profit from this gargantuan trend ahead!

Access this special "Green Industrial Revolution" presentation now

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.

More on Investing Articles

Social media and digital online concept, woman using smartphone
Investing Articles

Will Lloyds shares recover in 2022?

Lloyds shares have struggled this year and the looming recession won't help. But I'd still buy them today.

Read more »

Two hands holding champagne glasses toasting each other with Paris in the background
Investing Articles

Can the stock market make me rich even now?

Here are three ways I'm coping with the stock market's recent bout of weakness and aiming to build wealth in…

Read more »

Cogs turning against each other
Investing Articles

3 top investment trusts to buy right now

Investment trusts offer a wide range of options for investors. And in troubled times, they provide some safety through diversification…

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

Why hasn’t the FTSE 100 crashed in 2022?

The catastrophic events of 2022 have left investors around the globe fearing the worst for stock markets. And some have…

Read more »

Trader on video call from his home office
Investing Articles

2 inflation-resistant FTSE 100 stocks to buy today

Soaring inflation could dent my returns if I don't take care. Here are two top inflation-resistant FTSE 100 stocks I'd…

Read more »

Tabletop model of a bear sat on desk in front of monitors showing stock charts
Investing Articles

Why a bear market is an investor’s best friend

A bear market can certainly be scary. But any investor tempted to sell might benefit by looking at Warren Buffett's…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

The Rolls-Royce share price could be stuck below £1 for a while. Should I buy?

The Rolls-Royce share price has been trading at penny stock levels since April. Could the stock be a bargain at…

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

I’m aiming to make £45,000 in passive income with UK shares and never work again!

Investing regularly in UK shares can generate a substantial passive income over the long run. Zaven Boyrazian demonstrates how.

Read more »