Whatever things Ceres Power (LSE: CWR) may be good at warming up, its own share price has not been one of them lately. Over the last year, Ceres Power shares have tumbled by 52%.
So, could this be the right moment for me to add the fuel cell maker to my portfolio?
What’s behind the fall?
Over the past year, a lot of tech shares have seen their share prices fall, so Ceres is far from alone in that regard. Investors have been reassessing some of the valuations that had previously been attached to tech shares and considering how justifiable they are.
On top of that, Ceres’ business performance lately has not exactly been spectacular. Revenue and other operating income for the first half is expected to come in at £10m, a 42% decline on the same period last year. The company looks set to remain loss-making. Last year, post-tax losses ballooned to £21m.
For now, the company remains flush with liquidity, ending the first half with £221m in cash and cash equivalents. The fall in revenues is also not as bad as it may seem, since it largely reflects the timing of contracts rather than a fundamental deterioration in the business. Still, in itself that reflects how reliant the company currently is on a very limited customer base.
Set against that, can Ceres Power shares justify their combined worth of over a billion pounds?
Valuing Ceres Power shares
I do not think they can. I tend to value shares using either a price-to-earnings ratio or discounted cash flow model.
For now, Ceres’ earnings are non-existent as it remains loss-making.
What about cash flow? In short, I think it is too early to tell. The future demand for the sort of fuel cells Ceres makes could be large, but then again they might be overtaken by another technology in due course. If they do become popular, Ceres’ early work on them could help it scale up fast. Or it may be that a late entrant to the market spends heavily and outperforms the initial players. On top of that, the economics of Ceres’ business model once it is scaled up remain hard to know.
With so many variables, I think it is impossible to make a meaningful estimate of Ceres’ likely future cash flows.
Why I’m waiting
Down the line, then, it may be that Ceres Power turns into a large and successful business. I think it has promising technology in an exciting field likely to see strong growth in coming years.
Right now, though, it is hard to know how the business might do in future. A market capitalisation in excess of a billion pounds seems expensive to me. Even after Ceres Power shares halved in the past year, I still have no plan to buy them for my portfolio. But I will keep an eye on how the business performance shapes up over the next several years.
