Most penny stocks fail to live up to expectations. But in 2020, it seemed as if ITM Power (LSE:ITM) could do no wrong. Shares of the hydrogen enterprise skyrocketed. And by January 2021, investors who bought shares just a year earlier reaped a jaw-dropping 883% return!
Such gains in such a short space of time are almost non-existent within the world of large-cap FTSE 100 enterprises. That’s why penny stocks remain so popular despite their extreme levels of risk. But while ITM Power surpassed a market-cap of over £2bn, momentum eventually faded.
Investor excitement turned to frustration as the company struggled to transition from research to commercial production. Order delays and missed earnings targets resulted in a steady trickle of investors selling up and moving on. And the once £3bn+ enterprise with a 717p stock price now sits at a £166m market-cap trading at just 27p per share – a 96% decline.
Such are the risks of investing in unproven businesses regardless of their long-term potential. However, despite what the direction of the share price suggests, ITM Power’s actually been making a lot of promising progress. So are we potentially looking at the start of yet another near-quadruple-digit surge?
Demand’s heating up
It seems demand for green hydrogen is on the rise in Europe. ITM Power has signed new contracts with customers for its Neptune electrolyser system, resulting in a record contract backlog of £135m. At the same time, revenue over the six months leading to October jumped by 74.2%, reaching £15.5m. And management continued to reiterate its full-year sales targets of £18m-£22m.
Profits aren’t expected to materialise, but the group’s cash position is on track to improve, reaching £185m-£195m, giving management ample financial flexibility to continue executing its strategy.
Is a share price surge coming?
If ITM Power can continue building its order book and fulfil its obligations to customers, I wouldn’t be surprised to see the almost-penny stock start climbing again. Having said that, I doubt investors are going to see yet another near 1,000% rally in 2025.
Hydrogen-demanding projects across Europe are seemingly receiving the green light to reach the final investment decision stage of project planning. This undoubtedly offers ITM Power a welcome tailwind on which to capitalise in the coming years. And with limited exposure to the US markets, the firm’s future growth shouldn’t be heavily impacted by the cutting of environmental spending under the new US administration.
However, even CEO Dennis Schulz said: “Gone is the unrealistic hype that the hydrogen economy would develop overnight”, suggesting that an investment in ITM Power today is a long-term buy-and-hold commitment, not a short-term buy-low-sell-high trade.
The bottom line
Having been a critic of ITM Power’s surge in 2020, my opinion on this enterprise has improved over the years, both due to the more reasonable valuation and actual tangible results being delivered. However, even after falling by over 90%, the small-cap enterprise is still trading at a premium relative to its cash flow.
For now, I’m sitting on the sidelines, patiently watching to see if management can continue capturing the developing hydrogen market.
