The share price of ITM Power (LSE:ITM) performed exceptionally well in 2020, rising from 81p to 538p. The momentum continued up until the end of January this year, reaching an all-time high of 717p. That’s an overall increase of around 700% in the space of 12 months.
But since then, it’s fallen by nearly 35%. What happened? And is this a buying opportunity for my portfolio?Â
What’s going on with ITM Power’s share price
ITM Power is a hydrogen supplier. The company designed and developed a technology that uses electrolysis to convert water into its base elements, namely hydrogen and oxygen. Given that the classic approach of extracting hydrogen requires fossil fuels and isn’t exactly environmentally-friendly, ITM’s zero-emission solution sounds promising. At least, I think so.
In 2020, the UK government announced new legislation that aims to eliminate carbon emissions by 2050, focusing particularly on utilising green hydrogen. This was fantastic news for the company. And with good progress being made in its existing projects with Honda, Nissan, and Royal Dutch Shell, its share price took off. So why is it falling now?
The pandemic has caused disruption to many businesses, and ITM Power is no exception. Due to government restrictions, there were numerous delays in the installation of its technology across multiple projects. Consequently, overall revenue generated between May and October last year fell by a massive 92%, and losses increased by 22%. Needless to say, this isn’t good news. A sudden decline in ITM’s share price is understandable in this context.
Reasons to be optimistic
The decline in revenue is undoubtedly bad. But it’s worth noting that this income is delayed and not lost. The disruption from Covid-19 is ultimately a short term problem. And once project instalments can resume, ITM’s management team expects approximately £3.1m of revenue flowing into the business.
As such, analyst forecasts indicate expected revenue of £6.7m by April 2021 that should surge to over £32m a year later. That’s nearly a 900% increase compared to what was generated in 2019.
Whether the firm can meet these expectations has yet to be seen. But it does appear to be on track. It recently announced plans to extend the capacity of its Shell refinery project by 100MW. And it also completed its first electrolyser sale in the Japanese market, further establishing its international presence.
The bottom line
I continue to admire ITM’s technology and the impressive progress the company has made over the last few years. However, as I’ve previously discussed, the valuation still looks exceptionally expensive. Even after the recent share price decline, ITM’s market capitalisation is around £2.5bn. Assuming it can achieve the expected £32m revenue in 2022, that places the stock at a price-to-sales ratio of 78.
To me, this looks like a classic case of ‘great business, bad stock’, and so it’s staying on my watch list for now.