Should I buy Ceres Power shares to ride the hydrogen energy boom?

Ceres Power shares have dropped more than 50% over the past year. Our writer thinks it could do well, so why isn’t he investing yet?

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I expect demand for renewable energy to grow sharply in coming years. If it does, developers of equipment like battery cells could see sales soar. One such company is London-listed Ceres Power (LSE: CWR). So, should I be thinking about adding Ceres Power shares to my portfolio?

Assessing the investment case

There are several things I like about the company’s business model.

First, it has developed some unique intellectual property when it comes to cell stack technology. That could be an important enabler in growing the storage and use of hydrogen energy.

Another positive element, in my view, is that the company’s system of licensing means it ought to generate royalties as its installed base grows. That could mean Ceres commercialises its technology in a way that generates sizeable cash flows, without necessarily having to tie up large amounts of its own capital.

Ceres is burning cash

For now though, while I like the company’s business model in principle, I think it still needs to prove its value in practice.

Last week, the company published its final results and quite a few elements would concern me if I was considering buying Ceres Power shares.

Annual revenues fell 28%. The company had already set the expectation of such a fall, but for a company in its growth phase I do not see sharply declining revenues as a positive sign.

The operating loss more than doubled to £52m. For a company that generated revenues of £22m, that strikes me as an alarmingly high number.

The cash flow statement in the balance sheet was even worse. Net free cash outflows last year came to £89m. Meanwhile, cash and cash equivalents at the end of the year were £63m. The company does also have big short-term investments that it could probably convert to cash in a hurry. But if it keeps burning cash at the current rate, I see a risk that it will need to dilute shareholders to raise more funds.

Catalysts for change

Last year’s results do not look good to me. But there may be some cause for optimism about this year.

Progress is being made on some joint ventures in China that were originally expected to be inked last year. Once they are signed, that could provide a substantial boost to the company’s revenues. I think if news comes that the contracts have been signed, Ceres Power shares could rise in response.

I also continue to feel that the roster of sophisticated partners — such as Bosch and Korean firm Doosan — bodes well for future customer demand for Ceres technology.

What I’m doing

I can now buy Ceres Power shares for less than half of what I would have had to pay a year ago.

However, I am not tempted. I like the company’s prospects and its business model in principle. But I remain to be convinced that it can deliver large profits. Last week’s results did nothing to soothe my concerns.

I would want to see a combination of revenue growth and consistent profitability before putting my money into the shares. For now at least, those are both absent so I am not buying.

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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