Energy cell and battery producer Ilika (LSE: IKA) has been on a tear lately. By mid-December it had already quadrupled from its 2020 lows. In the month between mid-December and now, the Ilika share price has doubled again.
Here’s what I would do now.
1. Understand the business
Ilika is not a household name. So the first thing I do in a situation like this is try to understand the business. A good way to do this is by reading as much about it as possible. Its annual reports and news releases are available on its website for free. Reading them helps give some overview of the company and its likely prospects.
Ilika specialises in solid state battery technology. Originally spun out of university research, the company focuses on two product lines called Goliath and Stereax. While it has been mostly focussed on getting the technology right to date, it is now moving into larger scale production. Last year it started to move to production at scale on the Stereax line of products.
As well as money it gets from commercial activities such as sales and licensing, the company also receives some grant funds. These have helped its revenue. But increasingly, Ilika’s revenue comes from commercial sources. That suggests that the end marketplace has growing confidence in Ilika’s products.
2. Understand the wider trends
I think one of the reasons the Ilika share price has jumped is because of a wider theme in investing. There has been a scramble to get into alternative energy forms such as hydrogen.
While a lot of money has chased such energy companies, the number of companies with working technology is limited. I think one reason Ilika has seen such a share price rise may be that investors looking for energy storage companies are piling into it.
Such a thematic approach to investing needs to be handled carefully, in my view. It makes sense to identify broad themes which could help a given sector do well in future. But not all companies will have positive returns, especially when a lot of thematic money pours into a limited number of shares in fairly small companies. That can drive up prices to levels I wouldn’t regard as good value, even if the underlying business is strong.
3. Try to value the shares
Even after a steep rise such as that of the Ilika share price, can be followed by continued upward momentum sometimes. That could be because the shares are fundamentally undervalued, and the market is correcting that. But it could also be the continuation of a form of group euphoria, foreshadowing a price fall when pragmatism reasserts itself.
While the first is an example of investment, I regard the second as mere speculation. So in looking at a company like Ilika, I try to assess its fundamental value. It does have proven technology, a head start on competitors, and a history of revenues.
But it is lossmaking and I don’t understand the technology well enough to understand the company’s potential competitive advantage fully. The Ilika share price of close to one hundred time sales looks high to me.
I’ll pass on Ilika in favour of selecting a company whose products I can understand fully, at a lower price multiple.