Hydrogen energy group ITM Power (LSE: ITM) has seen its shares double over the last six months. Taking a longer view, ITM’s share price has risen by around 1,100% over the last five years.
Recent news from the company suggests progress has continued this year, with the order backlog up by 24% since late January. However, ITM Power’s market-cap has now reached nearly £1.4bn. Is the stock still a buy, or should we wait for a better entry point?
A greener Europe
Hydrogen is a zero-emission fuel which has the potential to replace fossil fuels in markets such as heavy transportation and some industrial processes. ITM’s focus is on building hydrogen electrolysers — plants which convert electricity into hydrogen, ready for commercial use.
One catalyst for ITM Power’s strong share price growth is that it’s secured commercial partnerships with oil and gas group Royal Dutch Shell and chemical giant Linde. Winning the backing of these two heavyweight industrial groups suggests to me ITM’s technology has real commercial potential.
Although producing hydrogen is quite energy intensive, using renewable energy makes it possible to produce green hydrogen. This is ITM’s main focus. Many analysts expect the EU will provide support for green hydrogen in the coming years, supporting rapid growth in this sector.
Scaling up with new factory
ITM estimates the electrolyser market could be worth £9bn. But we’re a long way from that point at the moment. The company’s latest update in June showed a contracted order backlog of £21.8m, with a further £30.6m of orders in negotiation.
Looking ahead, ITM says it has a “tender opportunity pipeline” worth £263m and recently secured a contract award for an 8MW electrolyser.
Broker research published on the company’s website suggests the group’s annual revenue could rise to £56m by 2022. But, even at that stage, the business is expected to remain loss-making.
However, management hopes its new Bessemer Park electrolyser factory in Sheffield will provide the foundation for much more rapid growth. The new factory will have an initial production capacity of 300MW per year, rising to 1GW in the mid-2020s.
Costs are expected to fall rapidly as the new factory scales up. ITM’s projections indicate electrolyser costs could fall from more than £1,000 per kW today to under £500/kW by the mid-2020s.
ITM share price: too high or just right?
Although ITM Power has some supportive backers, it’s worth remembering they all invested at a much lower price. For example, Linde paid £38m for its 20% stake in ITM Power, a price of 40p per share. As I write, ITM power’s share price is 270p.
I think ITM could be a good business with good technology. But this year’s surging demand for green energy stocks means a lot of growth is already priced into the stock. With a market-cap of £1.35bn, the business is now valued at 25 times 2022 forecast sales. That’s not cheap.
I suspect any disappointment or delay could cause the shares to crater. I think it makes sense to wait for a better buying opportunity.