After a huge decline, the ITM Power (LSE: ITM) share price is now starting to rebound. In the last few weeks, it has jumped from 45p to 64p – a gain of 42%.
Now, this green hydrogen stock has always looked like it could have a lot of potential. Is now the time to buy it for my portfolio? Let’s discuss.
What’s driving the share price higher?
Much of the recent share price action appears to be down to the company’s H1 results, which were posted on 31 January.
For the period ended 31 October, the company generated revenue of £8.9m, an increase of 345% on the prior-year figure.
Meanwhile, the group advised that it had completed the implementation of its 12-month turnaround plan on time. This involved streamlining both its product portfolio and its workforce, and automating processes. As a result of the turnaround plan, ITM is now a stronger, more focused, and more capable business, according to management.
CEO Dennis Schulz was also quite optimistic about the future, stating that the long-term trajectory for green hydrogen remains an “unparalleled opportunity”.
We have put the necessary foundations in place to ready ITM for the large-scale opportunities and significant demand in the market that are yet to come.
ITM Power CEO Dennis Schulz
Looking ahead, the company said that it expects revenue of £10m-£18m for FY24 (ending 30 April 2024). For reference, revenue last financial year was £5.2m. So, the company appears to be growing its top line at a rapid rate.
Should I buy?
While this all sounds encouraging, I have some reservations about investing in ITM Power.
Firstly, the company has a history of disappointing investors on the revenue front.
For example, when I covered the clean energy company in early 2023, the consensus revenue forecast for that financial year was £25m. Revenue ended up coming in at just over £5m – roughly 80% lower.
This issue has been noted by City analysts. “We’ve learnt over the past 18 months the scale-up takes time,” wrote analysts at Barclays in October.
It’s worth noting that Barclays’ analysts predict eight-fold growth in the hydrogen market over the next 30 years. However, they’ve highlighted electrolyser manufacturers’ difficulty in transitioning from small-scale to large-scale operations.
They currently have an ‘underweight’ rating on ITM Power shares as do analysts at JP Morgan.
Another issue for me is that the company isn’t profitable and doesn’t look like it will generate a profit in the next few years. This adds a lot of risk to the investment case. With no profits, it’s hard to know what this business is really worth.
Finally, there’s short interest. Currently, ITM Power is among the top 10 most shorted shares on the London Stock Exchange. In other words, several hedge funds expect the share price to fall from here. I imagine they see the current price-to-sales ratio of 75 as too high. In my experience, investing in a heavily-shorted stock is dangerous. More often than not, the hedge funds get it right.
Given the company’s patchy revenue track record, its lack of profits, and the short interest, I’m happy to pass on the stock for now.
It does look exciting. However, all things considered, I think there are better growth stocks to buy for my portfolio today.
