Ceres Power (LSE: CWR) is a UK-based developer of fuel cell technology. With such technology expected to be in increased demand in coming years, Ceres has attracted a lot of attention. Its shares have had a bumpy few months, but still sit 80% above where they were a year ago. And over a five-year period, the Ceres Power share price has increased tenfold.
With that sort of share price growth behind it, what is the outlook now? Here I weigh some pros and cons of the Ceres Power share price.
Actual products, strong growth
With the buzz around alternative energy sources in the past year, a lot of companies have been vying for investors’ attention. Some have miniscule revenues, while others have largely unproven technology still in a development stage.
By contrast, Ceres has a 20-year track record. Last year its revenues and other income were £21.9m, up 15% from the prior 12 months. It ended the year with a confirmed order book of £54.3m. Clearly, Ceres is not just a clever idea or a couple of scientists wielding a prototype. It’s an established business generating substantial revenues.
Commercial progress
It has also nurtured commercial relationships with large customers like Bosch and Doosan. Engineering specialists on that scale know far more about fuel cell technology than I ever will. So I take their growing relationships with Ceres as a vote of confidence in the company’s technology.
Bosch and Chinese group Weichai have also made an equity investment in Ceres totalling £54.3m. This suggests that they see commercial potential in the company. That view seems to be shared by many investors. In March, within a day of announcing a new fundraise, the company received investment of £180m.
Ceres Power share price valuation
With the Ceres Power share price at £9.80, the company is currently capitalised at £1.9bn.
There is no way to calculate a price-to-earnings ratio for the company, as it has been consistently loss-making. Another valuation metric sometimes used is price-to-sales. In the case of Ceres, its revenue isn’t just sales – it can also include grant income. The current market cap is around 85 times 2020 revenue and income. That seems very steep to me. So using traditional valuation metrics, I don’t find the Ceres Power share price that attractive.
But are such metrics the best way to value a growth company like this? Revenue has increased roughly 700% in less than four years. I think the commercialisation opportunities from the company’s growing client base could help future revenue growth. As it gets more scale and builds its reputation, the company could start to earn profits.
Would I buy?
There are risks here, though. The company has attractive technology, but alternative energy is a booming industry attracting lots of capital. That could increase competitive pressure on Ceres Power, and damage profitability for the industry as a whole.
Another risk is dilution. The fundraising this year strengthened the balance sheet, but at the cost of diluting existing shareholdings. As the company seeks to continue growing, it could try to raise more capital and water down shareholders’ holdings even further.
Ceres Power has proven technology, but it doesn’t yet have a proven profitable commercial model. That makes its share price a turn-off for me.