Over the past 12 months, the ITM Power (LSE: ITM) share price has jumped in value by more than 500%. After this performance, the stock appears to look expensive on the face of it, but the shares have increased five-fold in value after all.
However, I believe the company is only just getting started.
To understand why the stock has performed so well, it makes sense to look at ITM’s underlying fundamental business.
The company is a manufacturer of polymer electrolyte membrane (PEM) electrolysers, primarily used for hydrogen production. It sells these products to customers such as chemical group Linde, which recently acquired a 24MW electrolyser to be installed at the Leuna Chemical Complex in Germany.
ITM Linde Electrolysis GmbH, a Linde and ITM Power joint venture, will build the electrolyser using ITM’s PEM technology. The electrolyser will produce green hydrogen to supply Linde’s industrial customers.
This is just one of the many deals ITM has or is planning to sign. To meet the demand for these new products, the company has built the ITM Power Gigafactory, a high capacity, semi-automated PEM electrolyser manufacturing facility. Management believes this will be the first of many factories supplying these products.
The size of ITM’s potential market is massive. The EU alone is targeting 40GW of green hydrogen production by 2030. That’s just the start. The current demand for so-called grey hydrogen produced from fossil fuels is currently 140GW per annum in Europe. Replacing this demand may lead to a surge in demand for products from companies such as ITM.
ITM’s focus is green hydrogen, produced by green or renewable energy. And many analysts think scaling up the hydrogen industry will be fundamental in reducing global consumption of fossil fuels.
The ITM Power share price is still cheap
ITM has built one 1GW Gigafactory and has enough cash to fund another 2GW facility. I think this could be just the start. The figures above show how significant the demand for green hydrogen will be, and this group has the first-mover advantage. It’s already producing and selling its PEM electrolysers. Costs are also expected to fall by nearly 40% over the next few years as it scales up production.
However, the firm isn’t expected to report any profits for some time. That makes it difficult to value the ITM Power share price at this juncture.
Still, the global hydrogen market size is expected to exceed $200bn by 2027. If ITM can grab just 1% of this market, the company could generate $2bn in sales. I don’t think that’s too ambitious over the long term.
If the organisation can take this market share, its current market value of around £2.5bn looks far too cheap to me right now. As such, I think the ITM Power share price may be a great long-term play on the global green energy boom for risk-tolerant investors.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.