Should I buy shares in green hydrogen company ITM Power in 2022?

The green hydrogen market is expected to grow significantly in the years ahead. Edward Sheldon looks at whether he should buy shares in ITM Power to capitalise.

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Shares in hydrogen energy solutions provider ITM Power (LSE: ITM) have suffered a pullback in recent months. Back in early March, the ITM share price was above 400p. Today however, it’s under 300p.

Here, I’m going to discuss whether this share price dip has presented me with an attractive buying opportunity. Is now the time to buy ITM Power shares for my portfolio?

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Three reasons to be bullish on ITM Power shares

There are certainly reasons to be bullish on ITM Power shares. For a start, the company operates in a high-growth industry. According to industry experts, the market for green hydrogen is expected to grow 10-fold in the next 30 years as the global economy shifts to renewable energy.

Clean hydrogen has emerged as a critical pillar to any aspiring global net zero path,” wrote analysts at Goldman Sachs recently.

It’s worth noting here that Europe recently announced a plan to significantly reduce its reliance on Russian natural gas by the end of 2022. The plan involves finding alternative supplies of gas in the near term, while focusing more on renewable energy in the medium to longer term. This could benefit the green hydrogen market and players within it.

Secondly, ITM is growing at a rapid rate. At the end of 31 October 2021, it had a backlog and pipeline of 1,379 MW, up roughly 180% year-on-year. “We are making very solid progress, with a number of projects won which have resulted in a significant increase in our work in progress,” commented CEO Graham Cooley.

Additionally, ITM Power has been getting some positive write-ups from brokers. Last month for example, RBC upgraded ITM to ‘outperform’ from ‘sector perform’ and gave it a price target of 500p. That’s nearly 70% higher than the current share price.

Meanwhile, in March, JP Morgan analysts upgraded the stock to ‘overweight’ from ‘neutral’, saying future policy announcements to cut fossil fuel imports could be a catalyst for green hydrogen adoption in the medium term.

Three big risks that could hit the share price

However, there are some major risks to consider here. One is the fact that the company is not profitable. For the year ending 30 April 2023, analysts expect the group to generate a net loss of £35m. Owning shares in non-profitable companies is risky right now. Their share prices can fluctuate wildly.

Another issue is the valuation. ITM doesn’t have a price-to-earnings (P/E) ratio as it doesn’t have any earnings. It does have a price-to-sales ratio though and that’s about 32 on a forward-looking basis. That’s very high. Investing in an unprofitable company with that kind of valuation is a risky strategy, to my mind.

Finally, analysts’ projections here have not been very accurate in the past. When I last covered ITM in January, analysts were expecting revenue of £22.8m for the year ended 30 April. However, now they expect £16.5m. That’s a big decrease. Looking ahead, analysts expect revenue of £58.7m for this financial year. But I would take this figure with a grain of salt.

ITM Power: should I buy now?

Weighing everything up, I’m going to leave ITM on my watchlist for now. The growth story certainly looks interesting. However, given the risks around profitability and valuation, I think there are better stocks to buy today.

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Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. 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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