ITM Power (LSE: ITM) shares have been a popular investment in recent years and it’s easy to see why. A renewable energy company, ITM Power specialises in green hydrogen. And the market for this form of clean energy is projected to grow by over 50% per year between now and 2030.
Unfortunately though, the shares have produced disappointing returns lately. After a big run up in 2020 (when renewable energy stocks were on fire), they’ve fallen significantly. With that in mind, here’s a look at how much I’d have today if I’d invested £1,000 in the clean energy stock a year ago.
Substantial losses
On 17 January 2022, ITM Power shares closed at 342p. Today, however, they’re trading at 88p – approximately 74% lower.
What this means is that if I’d invested £1,000 in the growth stock a year ago (at the closing price), my money would now be worth about £260 (my calculations ignore trading commissions).
It’s worth pointing out that ITM Power doesn’t pay dividends because it’s not yet profitable. So, there would be no income from the stock to offset my capital losses.
So, all I’d have from my original £1k investment is £260. To break even, I’d need to generate a gain of about 285% from here.
Two takeaways
To my mind, there are a couple of key takeaways here.
One is that thematic investing isn’t always easy. I’m a big fan of this approach to investing. I like to invest in companies that are set to benefit from powerful long-term themes and trends such as the ageing population, the digitalisation of finance, and automation/robotics.
However, one needs to be selective with stock selection when taking this approach. Early-stage companies with minimal revenues and no profits can be very risky investments. With these kinds of companies, there’s a lot that can go wrong.
We’ve seen this with ITM Power over the last year. In October, for example, the company advised that it was experiencing manufacturing issues. This news sent the share price down 35%.
Another takeaway is that it’s essential to pay close attention to a stock’s valuation. When I covered ITM Power shares last year, I was put off by the sky-high price-to-sales ratio. This time last year, it was near 100.
In hindsight, that valuation was way too high. By paying attention to the valuation here, investors could have potentially avoided some big losses.
Buying opportunity?
Are ITM Power shares worth buying today given that they’re down more than 70% over the last year?
I’m not convinced they are, personally.
Yes, the company is expected to generate some strong revenue growth in the years ahead. This financial year, revenue is projected to come in at £24.6m, up from £5.6m last year.
But with the price-to-sales ratio currently sitting at 23, the valuation still looks high to me.
And I’m not the only one who thinks the valuation is elevated. Currently, ITM Power is one of the most shorted stocks on the London Stock Exchange, meaning that hedge funds are betting the stock will continue to fall.
Given the high valuation here, I think there are better stocks to buy today.
