Since the start of the year, shares in Ceres Power (LSE: CWR) have moved down 3%. But what that headline figure does not make obvious is the journey they have been on lately. The Ceres Power share price soared 39% in the first three weeks of January. Over the past several weeks, it has lost over 30% of its value.
What on earth is going on – and could the recent price drop be a buying opportunity for my portfolio?
Potential game changer
The short-term answer is that January brought a lot of information that could affect the investment case and therefore the Ceres Power share price.
Ceres signed a big deal: a long-term manufacturing and licence agreement for its solid oxide electrolysis cell stacks and solid oxide fuel cell stacks with a Taiwanese firm called Delta Electronics.
The sale includes revenue of £43m for Ceres, approximately half of which is expected to be recognised as revenue this year. Ceres’ total revenue last year was approximately £21m-£22m, so this new deal could be a game changer.
That explains why the share price soared last month.
Slow progress
But the Delta agreement could change the game in more ways than one.
While the revenue boost would be welcome, the deal could reduce the likelihood of Ceres moving forward in the Chinese market.
That is not just a theoretical concern.
For several years, Ceres’ management has made much of joint ventures it expected could help it break into the Chinese market. Those were repeatedly delayed. Ceres now expects they will never come to fruition in their current form, although the firm continues to explore options with Chinese company Weichai.
The apparent loss of the prospective joint ventures is disappointing. The repeated delays mean it is not entirely unexpected despite Ceres’ longstanding enthusiasm for them. But the abrupt shift in fortunes does raise questions about the management’s skills.
Did they recognise the China deal was going nowhere fast and recalibrate on that basis? Or have they not properly targeted the best potential markets?
My concerns about executive competence were heightened by news last month that work on factories for both Bosch and Doosan has been delayed.
Why buy now?
When assessing this sort of growth company, I consider a few questions.
First, does the technology give it a potential competitive advantage? With a growing order book from sophisticated clients, I think Ceres is looking good on this score.
But I also ask whether a firm has the right commercial model and if its shares are attractively valued.
For now I think this business still has to prove the commercial model. Until that happens – which it has not yet – I will not even bother considering the shares. They could yet turn out to be a bargain. But I am not able to assess that comfortably without stronger proof of commercial viability for the business model.
So, while I like the technology story here, I am in no rush even to consider buying the shares. First I would like more evidence that Ceres has developed and can manage a commercial model that is set to be consistently profitable over the long term.
