The ITM Power (LSE:ITM) share price has been quite volatile over the last couple of months. It reached its all-time high towards the end of January this year, only to collapse by nearly 50% two months later. Since then, it has started rising again. And over the last 12 months, the stock up by more than 220%. But once again, the share price started falling today. What is causing all this volatility? And is this a company I should have in my portfolio?
The volatile ITM Power share price
I’ve previously explored ITM Power’s business. But as a quick reminder, the company designs manufactures and sells electrolyser technology that extracts hydrogen from water. The process doesn’t produce any greenhouse gas emissions and is relatively cheap. Thus it is becoming more favourable than traditional methods of extracting hydrogen from fossil fuels.
In 2020, the ITM Power share price exploded by more than 425%. What happened? First, the UK government unveiled its plans to eliminate the country’s carbon emissions, placing particular focus on using green hydrogen technology. Meanwhile, ITM Power continued to publish encouraging progress reports on its various projects worldwide, despite the disruptions from Covid-19.
It also completed the sale of a 2MW electrolyser to Linde Plc for its H2Pioneer project in Austria. And just a few weeks ago, the company submitted its planning application to build the UK’s largest electrolyser facility in partnership with ScottishPower. Further information about this application is expected to arrive by the end of Autumn later this year.
Overall, it seems that ITM Power is progressing relatively well. It’s securing new contracts and forming new partnerships, so I’m not surprised to see the share price going up overall. But today’s sudden 10%+ drop comes after the announcement that the business is moving its hydrogen refuelling stations into a separate entity. This move has added quite a bit of uncertainty about whether the management team intends to sell off the division once the separation is complete. While there is no indication of this, I think it’s fair to say the market is not particularly pleased with this latest move.
Investor expectations are exceptionally high
Despite what ITM Power’s £2.9bn market capitalisation might suggest, the company is still relatively small. In fact, last year, the firm only generated £3.29m in revenue. That’s a price-to-sales ratio of nearly 850!
Needless to say, the expectation of this business delivering strong performance in the future is very high. But based on the most optimistic outcomes of its projects, city analyst forecasts indicate a total revenue of around £32m in 2022. While this does place the forward price-to-sales ratio to a more palatable 87.5, that is still a lofty valuation.
Seeing a high level of share price volatility in companies with high expectations from investors is not uncommon. And if ITM Power is unable to deliver on investor expectations, then I think its share price could see sharp declines once again.
The bottom line
As promising as ITM Power is as a business, my opinion on its price remains unchanged. It simply looks too expensive for my portfolio, especially when other similar growth opportunities are available at much lower prices. Therefore the company is staying on my watch list for now.
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Zaven Boyrazian does not own shares in ITM Power. 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.