The Motley Fool

Is the Ceres Power share price attractive?

Image source: Tesla

Ceres Power (LSE: CWR) is a UK-based developer of fuel cell technology. With such technology expected to be in increased demand in coming years, Ceres has attracted a lot of attention. Its shares have had a bumpy few months, but still sit 80% above where they were a year ago. And over a five-year period, the Ceres Power share price has increased tenfold.

With that sort of share price growth behind it, what is the outlook now? Here I weigh some pros and cons of the Ceres Power share price.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Actual products, strong growth

With the buzz around alternative energy sources in the past year, a lot of companies have been vying for investors’ attention. Some have miniscule revenues, while others have largely unproven technology still in a development stage.

By contrast, Ceres has a 20-year track record. Last year its revenues and other income were £21.9m, up 15% from the prior 12 months. It ended the year with a confirmed order book of £54.3m. Clearly, Ceres is not just a clever idea or a couple of scientists wielding a prototype. It’s an established business generating substantial revenues.

Commercial progress

It has also nurtured commercial relationships with large customers like Bosch and Doosan. Engineering specialists on that scale know far more about fuel cell technology than I ever will. So I take their growing relationships with Ceres as a vote of confidence in the company’s technology.

Bosch and Chinese group Weichai have also made an equity investment in Ceres totalling £54.3m. This suggests that they see commercial potential in the company. That view seems to be shared by many investors. In March, within a day of announcing a new fundraise, the company received investment of £180m.

Ceres Power share price valuation

With the Ceres Power share price at £9.80, the company is currently capitalised at £1.9bn.

There is no way to calculate a price-to-earnings ratio for the company, as it has been consistently loss-making. Another valuation metric sometimes used is price-to-sales. In the case of Ceres, its revenue isn’t just sales – it can also include grant income. The current market cap is around 85 times 2020 revenue and income. That seems very steep to me. So using traditional valuation metrics, I don’t find the Ceres Power share price that attractive.

But are such metrics the best way to value a growth company like this? Revenue has increased roughly 700% in less than four years. I think the commercialisation opportunities from the company’s growing client base could help future revenue growth. As it gets more scale and builds its reputation, the company could start to earn profits.

Would I buy?

There are risks here, though. The company has attractive technology, but alternative energy is a booming industry attracting lots of capital. That could increase competitive pressure on Ceres Power, and damage profitability for the industry as a whole.

Another risk is dilution. The fundraising this year strengthened the balance sheet, but at the cost of diluting existing shareholdings. As the company seeks to continue growing, it could try to raise more capital and water down shareholders’ holdings even further.

Ceres Power has proven technology, but it doesn’t yet have a proven profitable commercial model. That makes its share price a turn-off for me.

Our 5 Top Shares for the New “Green Industrial Revolution"

It was released in November 2020, and make no mistake:

It’s happening.

The UK Government’s 10-point plan for a new “Green Industrial Revolution.”

PriceWaterhouse Coopers believes this trend will cost £400billion…

…That’s just here in Britain over the next 10 years.

Worldwide, the Green Industrial Revolution could be worth TRILLIONS.

It’s why I’m urging all investors to read this special presentation carefully, and learn how you can uncover the 5 companies that we believe are poised to profit from this gargantuan trend ahead!

Access this special "Green Industrial Revolution" presentation now

Christopher Ruane has no position in Ceres 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.