Penny stocks are notoriously volatile. And investors in ITM Power (LSE:ITM) know this all too well. The green hydrogen enterprise saw its share price skyrocket in 2020, reaching a peak in early 2021 that pushed its market capitalisation beyond £2bn!
However, since then, shares have tumbled more than 90%. The stock now trades close to 55p, down from over 700p, as the hype evaporates and investors’ exorbitant expectations have crashed back down to earth. That doesn’t quite make it a penny stock, given its market-cap still sits around £336m versus the £100m threshold. However, the business still has similar traits to these tiny corporations, including growth potential.
Even before its decline, I continually expressed my concerns regarding the firm’s valuation. And today, my reservations appear to have been justified. But now that ITM power has fallen so aggressively, is it finally a business worth buying in 2024?
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Management’s turning things around
Like most premium-priced businesses, ITM shares collapsed when the firm began missing targets. The company was in the middle of transitioning from development to delivery and, needless to say, the process wasn’t smooth. Pairing this with surging inflation and higher interest rates results in the complete decimation of the stock price.
Over the last 12 months, shares are still stuck in a downward trajectory, falling by another 42%. Yet, despite appearances, it seems management’s actually starting to deliver results.
Looking at the latest trading update, revenue for its 2024 fiscal year is expected to land between £16m and £16.5m. That’s leaning towards the upper end of its previous guidance. But more encouragingly, it seems the company’s managed to half its losses, which are on track to fall between £39m and £44m versus £94.2m a year ago.
Management’s been busy fixing the bottlenecks in the manufacturing of its electrolyser machines and closing down legacy projects. The end result is a significant reduction in costs as well as a refocusing of efforts on its flagship products. As such, the group believes it can turn a profit by 2028.
What about the valuation
An unprofitable stock at a £336m valuation compared to around £16m in revenue doesn’t strike me as cheap. After all, that puts the price-to-sales ratio at a whopping 21 times.
However, this price tag isn’t entirely bonkers. The group’s growth potential obviously helps justify it. But what’s easy to miss is that ITM Power has £250m of cash & equivalents on its balance sheet. This means that, unlike most penny stocks, the firm doesn’t have a funding problem.
As such, the stock looks to be trading at a far more reasonable valuation today compared to a few years ago. And the business is also in better shape in terms of operations. So does this merit an investment?
ITM Power remains a bit of a mystery. Its growth potential may be explosive. But it’s entirely dependent on the hydrogen alternative fuel industry. And it’s still far too early to know whether it will play a critical role in the future energy grid. Don’t forget there are plenty of other alternative fuel solutions competing for the same position.
In other words, the risk remains high, and it’s not a stock I’m tempted to buy right now.
