The share price chart for hydrogen company ITM Power (LSE: ITM) is not a thing of beauty. Down 47% in five years, the ITM share price has recently been close to its lowest point in years.
Still, that puts the price well above where it has stood at some points during its two decades on the stock market, most recently at various points in 2019, although at other points in that year, it was roughly where it is now.
After a heady few years, might the price now be closer to a fair valuation – and could it represent a potential bargain buy for my portfolio?
Jam tomorrow, still
The roller coaster ride of the ITM Power share price over 20 years reflects the fact that the company has promising technology and a potentially large market of users to target – but commercialisation has proven consistently challenging. As the hydrogen market is more crowded now than it was a few years ago, I expect that trend to continue.
Last year, ITM more than tripled its revenue, to £16.5m. It expects revenue this year to rise again, although less dramatically.
The approach has been fairly simple sounding. ITM has demonstrated more commercial discipline than it did historically, focusing on scaling up its most promising product lines and looking carefully at how to head towards profitability.
That said, profits remain elusive. Last year, cash burn was £53m. The company’s pre-tax loss narrowed considerably. But at £27.1m, it remained substantial. The business expects further cash burn this year of £55m-£70m.
While the company has not provided guidance on its expected bottom line, it has said it expects a full-year adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) loss of £35m-£40m.
So while the company’s renewed strategic focus has been good for sales revenues, the business model continues to be unproven, in my view.
Business thrown in for a fraction of the market-cap
Currently, the market capitalisation is £217m. It is now over half a year since the end of the period covered in ITM’s most recent results, but at that point net cash was £230m. Even allowing for cash burn since then on a pro rata basis of the full-year forecast, that means that the market is currently ascribing only around £15m-£20m as a valuation for the business itself, aside from the cash.
On one hand, that might seem like a bargain. ITM has proprietary technology, is ramping up its sales, and has been taking action to try and fix some of the challenges to achieving profitability in its business model.
Set against that however, remains the fact that it continues to lose money hand over fist. While its cash pile remains significant, I see a risk that it may need to dilute shareholders by raising more finance in the future.
The net cash position is not far off the market capitalisation, but the company continues to burn that cash at heady rates. That profile does not suit my approach to investing, so I have no plans to buy ITM Power shares even at the current price of pennies.
