The hydrogen company ITM Power (LSE: ITM) is all about providing energy. The ITM Power share price has certainly been energetic in recent years, but not always in a positive direction.
It is up by a third just over the past several weeks. But it is still 46% lower than it was a year ago – and has tumbled over 90% since January 2021.
Given the recent momentum, I have been having another look at the business prospects for ITM. Could now be the moment to add this renewable energy share to my portfolio?
Better direction but not out of the woods
The recent jump followed ITM’s release of its interim results last month.
These suggested that a turnaround plan under the current chief executive is starting to show positive results. Revenue for the half year more than quadrupled compared to the same period last year, almost reaching £9m.
The adjusted loss before interest, tax, depreciation, and amortisation fell by over three-fifths to £21m. The company said that its market reach has been “substantially extended” and project delivery performance has improved.
Clearly, things have been getting better for ITM.
But they had to, in my view — the company was previously heading nowhere fast (and expensively).
While the business metrics are improving, this fairly small company remains heavily loss-making and the revenues, while growing, remain modest.
Cash burn has slowed and ITM ended October sitting on over a quarter of billion pounds. Still, that is over £60m less than 12 months previously.
Growth share valuation
Investors have historically disagreed about what the ITM Power share price ought to be.
Its small revenues and heavy losses can certainly make it look unattractive on paper. But a growth share like this is often valued based on what its potential is, rather than its actual performance to date.
After all, the sort of work ITM is undertaking now, such as improving its manufacturing processes, speeding up testing, and optimising its product portfolio for manufacturing at scale tend to be front-loaded with costs but could underpin business growth for years.
Trading around 60p, the ITM Power share price would need to jump by two-thirds from here to reach £1. It has been there in the past (just last year, in fact). That was despite the commercial strategy seeming to have less direction than is now the case.
Where next for the share price?
With a market capitalisation of £369m and that huge cash pile, the enterprise value of the business is now around £115m.
If the company surprises the market positively, I think the ITM Power share price could move up further from here. A large jump in revenues, sharply reduced cash burn, or ideally both could potentially justify a higher valuation.
If the news is good enough, I would certainly not be surprised to see the shares back at £1 each over the next several years.
For now, though, whether the company can achieve much higher sales while permanently fixing its cost base remains to be seen.
The shares still feel too speculative for my tastes as an investor. So I will not be buying any at the moment.
