Down 27% in weeks, is the Ceres Power share price a bargain?

Christopher Ruane looks at what’s behind the falling Ceres Power share price — and wonders whether he should invest in the hydrogen energy firm now.

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Since the first week of February, shares in Ceres Power (LSE: CWR) have lost over a quarter of their value. Over the past year, they have almost halved.

But from a long-term perspective, they have done well. If I had invested £300 in Ceres five years ago, my holding would now be worth over £1,000, even after the recent share price decline.

So ought I to add the shares to my portfolio in the hope of future recovery?

Up and down

I think it is helpful to understand what pushed the Ceres Power share price up – and what has brought it crashing down.

In a period when renewable energy shares have caught investors’ attention, interest in Ceres’ hydrogen technology has helped push the shares higher. Whereas some rivals are closer to an idea on the drawing board than a revenue-generating business, Ceres has an established client base and sizeable revenues.

But business development has been uneven. Last year’s revenues are expected to come in at around £21m, which is a sharp fall from the prior year. A delay in inking a large deal for deploying Ceres’ technology in China seems to have contributed to investor dissatisfaction at Ceres’ speed of progress.

The company remains heavily dependent on a few large customers. It also remains loss-making. Ceres’ most recent full-year results showed losses after tax of £21m. I expect that, when the 2022 results are issued, they will also show sizeable losses.

Promising technology

Given that consistent negativity, why has Ceres Power continued to excite some investors? After all, while the Ceres Power share price has fallen a lot, the firm’s market capitalisation of £711m remains substantial.

I think the valuation reflects three key questions, to which different investors have their own answers.

Will the future market for hydrogen energy be substantial? I think it will be, as global energy use remains high and users seek to increase the role of renewable forms.

Secondly, does Ceres Power have what it takes to do well in this market? Here, I see the answer as a qualified ‘yes’. The firm has promising technology. An impressive list of customers such as Bosch suggests Ceres may well be able to compete at scale on the global stage.

However, the hydrogen energy market is still developing. Ceres’ technology has put it in a promising position for now, but the road is long. It remains unclear how well the company will be able to adapt and grow as the market matures and competition likely intensifies.

Making money

The third question is one I think currently lacks a clear answer. Can Ceres consistently make a sizeable profit?

So far, it has been lossmaking year after year. That is not unusual for a young company as it seeks to build a market for its products.

But I am not yet convinced that the firm has a clear pathway to ongoing profitability at a level that would justify the current Ceres Power share price. For that reason, I do not clearly see the shares as a bargain and have no plans to add any to my portfolio.

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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