Are ITM Power shares about to explode?

Jon Smith talks through some reasons why he thinks ITM Power shares could perform well in the coming months as a renewable energy leader.

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For those that have been keeping an eye on ITM Power (LSE:ITM) shares over the past year, large swings for the stock aren’t unusual. Over the course of November to late January, the share price halved. Yet in just the space of a few weeks to early March, ITM Power shares jumped 66%. Does this mean that the share price is due for further strong gains into April?

Reasons to like ITM Power shares

ITM Power refers to itself as “world leaders in green hydrogen technology”. More specifically, it designs, manufactures and integrates electrolysers to produce the green hydrogen. This makes it a renewable energy stock, a sector that has been hot and on investors minds over the past year.

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There have been several positive developments over the past few months that I think have contributed to the spike in ITM Power shares but that could also help to propel the share price higher still.

Firstly, in late January the half-year results were released. It showed good progress being made in terms of new contracts being won by the company. It has a total contracts backlog of 499MW, worth some £198m, as well as a tender pipeline of 880MW, up 145% year-on-year.

In terms of financials, the business did post a gross loss of £2.6m. But it has cash of around £390m following some fundraising. This should ensure operations for the foreseeable future.

I think investors will start to price in higher earnings as more contracts are secured, which should cause ITM Power shares to rally.

Inorganic growth options

A second point that I think could help the shares to take off is the willingness of the business to buy, sell and partner with other entities in order to grow faster.

For example, it was recently announced that the business would partner with Vitol Holdings to form a new company, ITM Motive Limited. ITM Power will own 50% of the new company. This business will focus on new green hydrogen refueling stations.

To be able to partner with a large company like Vitol shows its ambitions. It also should help the company to grow at a faster pace by including outside partners.

An uncertain future

In terms of risks, the green hydrogen market is still not a mature market. Even with government investment and a push towards renewable energy, no one exactly knows what this sector will look like in 10 years’ time. There are various forms of clean energy. Unfortunately it might be the case that green hydrogen doesn’t feature heavily in this new age.

Further, the business is burning cash and posting losses. If the revenue from prospective contracts doesn’t materialise, then the business could find itself having to revert to expensive fundraising again.

Yet I do feel that ITM Power shares could move higher in coming months, so am considering buying some at the moment.

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Jon Smith and The Motley Fool UK have 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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