It’s been a good year for the ITM Power (LSE:ITM) share price. The green hydrogen company has seen its stock rise by more than 60% over the last 12 months. But this week, it crashed by more than 10% in a single day, following its latest earnings report. Was the news as bad as investors think? Or is this an overreaction that has created a buying opportunity for my portfolio? Let’s take a look.
A year of progress
Despite what the direction of the share price would suggest, ITM Power has achieved some impressive milestones. As a reminder, the firm is a specialist designer and manufacturer of electrolyser machines. These are capable of extracting hydrogen from water without emitting any greenhouse gas emissions. Needless to say, it’s a much more environmentally-friendly process than the traditional method of obtaining the element from hydrocarbons.
In 2021 it successfully completed the initial construction of the first electrolyser Gigafactory worldwide. It sold the world’s largest PEM electrolyser to its strategic partner Linde Engineering. And has refocused its efforts on larger-scale systems. As a result, it has around £36m of contracted backlog orders, along with £171m in the final stages of negotiation. These have increased by 125% and 44%, respectively, compared to a year ago.
For such a young business, that is a pretty impressive accomplishment. At least, that’s what I think. So why did the ITM Power share price crash after releasing the report?
Why the ITM Power share price tanked
As encouraging as this year’s progress has been, the financial performance isn’t as impressive. Despite the strides taken, revenue for its 2021 fiscal year came in at a mere £5.1m. That’s actually a 6% decline versus last year. However, it is worth noting that revenue in 2020 was inflated by grants that weren’t received in 2021.
The loss from operations stood at £26.7m. While this did improve by 9% from £29.4m, it showed the company is still in the red and will likely remain that way for quite some time. Fortunately, management has built up a substantial cash war chest of £176.1m, granting it enough of a runway to keep operations going for a while.
Overall, these are hardly terrible numbers. But when a business is carrying a £2.6bn valuation, the level of expectations from investors is exceptionally high. It seems many individuals are placing a substantial value on the firm’s contract pipeline. In addition to the £171m of near-signed agreements, there’s a further £378m in the early stages of negotiation. But I think it’s essential to realise that none of these contracts may get a signature.
With that in mind, seeing such volatility in the ITM Power share price is hardly surprising.
The bottom line
This business continues to intrigue me. Current analyst forecasts for 2022 predict that revenues will surge to around £26m. But even if ITM Power manages to meet this target, its inflated share price still places the price-to-sales ratio at a whopping 100. At such a lofty valuation, the slightest hint of trouble is enough to send a stock crashing down. Personally, I’m not interested in adding that level of risk to my portfolio. So, it’s staying on my watchlist for now.
Zaven Boyrazian 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.