The ITM Power (LSE: ITM) share price has fallen by around 30% over the last week alone. Although this popular hydrogen energy stock is still up by 120% over the last year, ITM’s sharp sell-off has prompted me to take a fresh look.
ITM has already forged partnerships with some big industrial names, including Royal Dutch Shell, Linde, and Snam. These deals suggest to me that the company’s technology could have serious potential. Now that ITM’s share price has fallen, should I be buying for my portfolio?
What’s gone wrong?
ITM Power’s share price is now down by 50% from the record high of 724p seen in late January. When I see a share price fall this fast, the first thing I do is try to find out why.
The first big fall came when the company released its half-year accounts, on 28 January. I’ve taken another look at this report. There’s plenty of good news, which I’ll come back to in a moment.
The bad news was that Covid-19 restrictions delayed the completion of work on customer sites. In turn, this caused revenue to fall by 92% to £0.2m. CEO Graham Cooley says that without these restrictions, revenue would have been £3.1m higher.
Personally, I’m not too worried about this. These delays are expected to reverse over time. As long as ITM Power has not missed out on any new opportunities as a result of these delays, I don’t think the half-year performance matters all that much.
ITM: order backlog is growing
ITM hopes to be able to sell modular hydrogen electrolyser systems that will allow customers to build fuelling facilities quickly and simply. Demand for the firm’s units is growing.
According to the half-year results, ITM’s contracted order backlog stood at £36m on 31 October, up from £16m one year earlier. The firm also reported a further £88m of work in advanced negotiations or where ITM is the preferred supplier.
Since January, ITM has also reported new deals with Scottish Power, Japanese group Sumitomo, and a planned expansion of its project with Shell.
As far as I can see, ITM still has strong operational momentum. The completion of the company’s new factory at Bessemer Park will support increased production capacity when needed.
ITM share price: my decision
ITM’s financial performance has suffered because of the pandemic, but as far as I can see the group is still making good operational progress. I’m not an expert on the hydrogen sector, but I think this business could be a long-term success.
Although broker forecasts suggest the business will remain loss-making until 2023, ITM raised £172m from investors in November last year. Funding looks safe to me, for now.
However, there’s still one red flag that will stop me investing. Although ITM’s share price has fallen, it still looks too expensive to me. This business is currently valued at £2,290m, even though revenue in 2022 is expected to be just £30m.
In my opinion, ITM’s valuation already prices in many years of successful expansion. I’m not comfortable paying so much upfront for future growth. For this reason, I’m not buying.