Up 37% in just days! Are ITM Power shares primed to explode?

Could a tremendous few days for ITM Power shares be the start of something bigger? Christopher Ruane has his doubts — and won’t be investing.

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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.

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 assessed. Consider taking independent financial advice.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has 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.

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