I’m reminded of a roller-coaster ride at a theme park when I look at a five-year ITM Power (LSE: ITM) share price chart. It’s got the big climb up, a bit of a false drop-off, then another almost vertical move northwards before a descent back to earth.
Having said that, even after a 75% decline this year, investors who bought the shares five years ago have still more than doubled their money.
But is the recent big share price dip an opportunity to buy?
Fading enthusiasm
The five-year chart does seem to perfectly encapsulate changing investor sentiment around the business.
In 2018, there was talk of ‘green hydrogen’ playing an immediate and pivotal role in the energy transition. And investors became increasingly bullish that ITM Power, with its advanced PEM electrolysers that produce hydrogen from water, was going to be at the centre of it all.
In fact, going back to read the 2018 annual report, I was surprised just how many deals the firm had signed. There was a fuel contract with the Metropolitan Police to roll out their new fleet of zero-emission vehicles. New hydrogen stations were opened on Shell forecourts. And more deals were in the pipeline with the future looking bright.
However, that did not translate into consistent revenue growth. In fact, the £3.2m it generated in FY18 was higher than the £2m it now expects to have made in the 12 months to the end of April. Plus, there’s anticipated to be an adjusted pre-tax loss of £90m during that period.
The firm’s measly revenue, coupled with such massive cash burn, is alarming. So it’s no surprise to me that the share price has taken a pounding.
However, there are still some reasons for optimism.
Turnaround under way
First, the company did have a net cash position of £281m at the end of the year, ahead of its own forecast. That should fund its operations for the next couple of years at least.
Also, under CEO Dennis Schulz, who joined in December 2022, it’s cutting costs and reducing its product portfolio to only the most promising core offerings. These are its state-of-the-art MEP 30 bar stack platform and its plug-and-play containers.
Both of these products are types of electrolyser, the machines used to separate the hydrogen and oxygen molecules in water. Its newest 30 bar stack platform is already being shipped to customers.
Valuation
While its efforts to slow down cash consumption should improve its financials, the stock is still incredibly expensive. Indeed, ITM currently has market cap of £442m, which doesn’t really make sense for a company barely generating any revenue.
Furthermore, the stock has a price-to-sales (P/S) ratio of 125. That’s an extreme valuation, to say the least.
Of course, that P/S multiple would soon come down were its sales to ramp up spectacularly. And investors could do well buying today if that happens. But that’s still a big if at this moment in time. Meanwhile, profits seem a distant prospect.
I do actually have a small position in the stock, as I’m bullish on green hydrogen. But that position is even smaller after the last few months, and I have no desire to top it up.
