Shares of the near-penny stock ITM Power (LSE:ITM) were on fire just a few years ago. The rising alternative fuels business captured investors’ hearts with its impressive electrolyser technology that could produce carbon-free hydrogen from water. As a result, between early 2020 and early 2021, shares climbed more than 700%!
Today, the dream of ITM Power becoming the new powerhouse in alternative fuels seems to have died. Since its peak, the stock has crashed over 90%. And even in the last 12 months, the downward trajectory continues with a further 41% decline.
What happened? And is now secretly the perfect time for investors to snap up shares at dirt cheap price?
From R&D to production
With a proven technology and high demand from customers, ITM Power saw enough success to transition itself from research-based to production – a journey that very few penny stocks get the luxury of following. Unfortunately, this is where things started to go wrong.
Management grossly overestimated its capabilities to meet promises to customers, resulting in cost overruns and long order delays. As such, revenue targets were missed and losses skyrocketed. Pairing this ugly financial performance with overblown expectations from overhyped investors resulted in a near-complete collapse in valuation.
However, while most investors seem to have lost faith, there’s still some room for optimism, especially following the latest trading update.
Righting the ship
The first step in solving any problem is admitting there is one. And ITM Power has certainly done that. More importantly, it’s outlined and begun executing a 12-month turnaround strategy that may be starting to bear fruit.
Its portfolio of products has been cut to just two flagship items – its MEP30 electrolyser and its Plug & Play containers. Meanwhile, its manufacturing facilities have been getting some upgrades to help automate the manufacturing process as much as possible.
Unfortunately, the headcount also ended up getting slashed. However, these moves seem to have put the company on track to hitting internal guidance once again.
Revenue for the first six months of its 2024 fiscal year ending in April came in at £7.5m, placing it on track to hit the firm’s expected range of £10m-£18m. Adjusted underlying losses are expected to be half, and the group’s current net cash position is actually ahead of the full-year target.
Time to buy?
Investing in penny stocks, or even firms close to being one, can be enormously rewarding in the long run if the company succeeds. After all, if hydrogen proves itself to be the best viable alternative to fossil fuels, ITM Power could find itself at the top of a massive global industry.
However, that’s still a very big ‘if’. Despite the progress made and improved financial flexibility, an investment in this business still looks like speculation to me. It could merit a small position from investors comfortable with volatility. But personally, I’m still keeping this company on my watchlist for now.
