The City welcomed today’s (26 March) final results from Ceres Power (LSE: CWR) and announcement of a strategic partnership with British Gas owner Centrica. The Ceres Power share price is up around 10% in the day’s trading.
That sort of fillip on results day is always welcome, though it is actually small fry for Ceres shareholders when compared to the share’s 12-month performance. Over the past year, the Ceres Power share price is up a stunning 458%.
People have been talking up Ceres’ renewable energy potential for years. One year ago, this was not some below-the-radar stock nobody had ever heard of.
So what has happened to transform the share price – and should I still consider buying some Ceres Power shares even now?
Sharp revenue drop
At first glance, it may seem difficult to grasp why the market greeted the results so well. After all, last year saw revenues fall by over a third, to £33m.
Gross profit also fell, the operating loss grew over 50% to £48m, and the company’s cash burn was around £19m.
So, why the investor enthusiasm not only today but also over the past year?
One reason was last year’s start to mass market manufacture of fuel cell stacks based on Ceres’ technology by Korean industrial firm Doosan. That is a powerful proof of Ceres’ technology being attractive.
It also highlights the potential benefits from the firm’s licensing model. Its intellectual property can help it earn royalties, without Ceres needing to spend heavily on making the cell stacks itself. That said, at £110,000, Ceres’ total royalties for last year were modest.
They should grow substantially over time, but by how much remains to be seen. I think that will be a key element in determining a fair share prices for Ceres Power over the coming years.
Taking a long-term view
In a way, that is not new.
Ceres Power has been listed on the stock market for over two decades already. The investment case has often rested on trying to ascertain what its technology might turn out to be worth if it can be properly commercialised at scale.
That has seen it go through some sharp ups and downs. Even after the past year’s boom, the Ceres Power share price is still just a fraction of what it was in 2021 – or 2009, or 2007.
But what has changed in my opinion is that the path to commercialisation now looks much clearer. Indeed, Ceres has already made important steps on it with the Doosan deal.
However, it continues to lose money and to burn through cash. While the technology is impressive, this is a crowded market. In the time it has taken Ceres to get this far, the space has become competitive.
Doosan is only one of Ceres’ partners and it is making good progress with other partners in markets including China and India. 84% of revenue last year was generated by four customers, which is a concentration risk.
Still, the company is moving in a positive direction and may be on the verge of scaling up substantially. That could help push the share price higher.
But those negative cash flows and losses bother me. I would prefer to see a proven profitable business model, so for now will not be investing.
