The Motley Fool

As the Powerhouse Energy share price falls, should I buy?

Image source: Getty Images.

Since the start of the year, Powerhouse Energy (LSE: PHE) has lost over 40% of its value. While the Powerhouse Energy share price is still 54% up over the past 12 months, its recent performance has been weak.

With the penny stock losing strength, is now a time to buy it for my portfolio?

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...

Powerhouse Energy and energy shifts

Powerhouse Energy has a proprietary technology that allows it to extract gas from used plastics. That gas contains hydrogen, which means that it can be used to fuel hydrogen cells.

Based on that, the investment case for the company would seem to tick a lot of boxes. Plastic waste has been a mounting concern – and Powerhouse seems to offer a partial solution for that. Hydrogen is seen by many commentators as a replacement for fossil fuels – and Powerhouse can help with that too.

Not only does the company seem to respond to current trends, it is moving forward commercially too. The first site using Powerhouse’s technology is expected to be operational in Ellesmere Port next year. A second plant is now planned, in West Dunbartonshire.

The company has also had some success licensing its technology abroad. Last month, for example, the company announced heads of terms with a view to licensing the technology in Hungary and Greece. That deal alone could net Powerhouse €250,000.

With positive developments like this, why has the Powerhouse Energy share price been falling?

The falling Powerhouse share price

First, it’s worth noting that Powerhouse isn’t a new company. Its listing dates back over two decades. While it’s a penny stock now, it once hit a valuation more than 1,000 times higher than today. By this point, many investors have long since lost confidence in the stock, no matter how promising the latest business developments may seem. That is understandable, but it isn’t necessarily rational.

Another concern when I look at the Powerhouse Energy share price is the company’s weak financial performance. Take its most recent annual report, covering 2019, as an example. The company – as has been the case for many years – didn’t report any revenue at all. It did sign a contract which ought to generate revenue in the future. But not a single penny came through the door in 2019. Meanwhile, the company lost £1.5m. The year before it also didn’t generate any revenue, and lost £2.3m.

For a company spending money in research and development before launching a product widely that is understandable. But the Powerhouse Energy share price even at its current low level means the company is capitalised at more than £200m. I think to justify such a valuation, a lot of things need to go very well for the company in future. Its track record to date gives me limited basis for confidence that that will happen.

I’m not buying

Even after its recent fall, I won’t buy Powerhouse Energy for my portfolio. As well as valuation concerns, risks include shareholder dilution if the company needs to raise funds, any teething problems at its first site incurring costs, and shifting environmental regulations affecting the attractiveness of its technology.

I think its technology and growing commercial plans mean business prospects are improving. But its valuation seems rich to me for such an unproven business model. 

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 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.

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.