It has been a dramatic week for shareholders in ITM Power (LSE: ITM). Between the start of trading on Monday and this morning, ITM Power shares surged 37% in value.
But even that dramatic rise leaves the stock at less than half its price 12 months ago. So are they set to soar – and should I buy?
All change
The key reason for this week’s leap was the announcement of a new strategy by the renewable energy company’s recently appointed chief executive.
In short, that involves cutting flab, being much more strategically focussed and keeping a firm lid on costs. Both the tone and content of the announcement involved a heavy dose of reality. It signalled that ITM needs to move beyond the sometimes scrappy mindset of being a start-up and become a disciplined commercial enterprise with an engineering mindset.
All of that sounds like a step in the right direction. Investors have responded by bidding up ITM Power shares. The company’s technology is well-regarded. Scaling up manufacturing and sales with the right commercial model could be highly lucrative.
Huge work to do
For now though, that state of affairs remains a distant end goal. There is no assurance that the new strategy can help ITM get there, in my view.
A look at the interim results that were published alongside the strategic update shows just how dire things are. Revenue in the first half more than halved to £2m (and the full-year number is expected to be around £2m too, implying hardly no second half revenues).
That came with a post-tax loss of £56.5m. Given that, I am surprised ITM Power shares jumped the way they did in the past few days.
Losing over £25 for every pound of revenue is a disastrous business model in anyone’s book. Some of the new fixes may help. Concentrating on a core range of products could help a more efficient allocation of resources. Scrutinising potential sales more rigorously in terms of cost-benefit analysis could avoid making deals that turn out to be lossmaking.
But huge challenges remain. Revenues remain tiny for a company with a £730m market capitalisation. I think ITM has a lot of work to do to prove it can grow them exponentially. Boosting sales dramatically while cutting costs significantly is a very hard balancing act to pull off.
Wait and see
In fact, I am not persuaded ITM can reach a point where it has a consistently profitable, large-scale business.
On its side is its technology, net cash of over £300m, and a clearer strategic focus than it had previously. But I think competition will grow over time. I remain unconvinced ITM has the ability to scale up commercially while keeping a firm lid on costs. Its history for many years already has been one of modest revenues and immodest cash burn.
If there is a great future for its technology, I might still be able to benefit from that by buying ITM Power shares at a future date. But for now I continue to see sizeable risks here. Any promising improvement in commercial performance might see the shares soar further — but I am nowhere near ready to invest yet.
