The Ilika (LSE:IKA) share price has been moving like a rollercoaster over the past couple of months. Despite seeing a massive 440% rise in 2020, the stock has since acted with immense volatility. Just last week, the company published a seemingly promising trading update, only for the share price to collapse three days later. What happened? And is this a buying opportunity for my portfolio?
The business
Ilika is a pioneering technology company looking to find a suitable replacement for lithium-ion batteries with its own solid-state batteries. The former type is currently in high demand due to the rising popularity of electric vehicles. However, such batteries suffer from some significant drawbacks, like the difficulty of recycling and having a relatively short lifespan.
The alternative that Ilika has designed overcomes these issues and provides a higher power density ratio. In other words, they can drive further and charge faster. That’s why the management team believes the technology will become the new standard by the end of the decade.
That certainly sounds exciting. And the technology is already being used on a smaller scale within medical devices and industrial wireless sensors. Ilika recently published a trading update that revealed good progress in its 70x expansion plan of small battery production. It’s also starting a new collaboration with Fiat to scale up its larger electric vehicle battery manufacturing capabilities. To me, this looks like encouraging progress, so why did the Ilika share price fall by 25% last Friday morning and why has it stayed low this week?
The falling share price
As exciting as this technology may be, the firm has yet to transform itself into a profitable organisation. That undoubtedly exposes investors to additional risks. Why? Because the management team has to find new ways to raise capital. And for a small, unprofitable business, debt financing isn’t a particularly viable option.
As a result, the company turned to shareholders to get its much-needed capital. Last Friday, Ilika announced a new share offer for investors to raise a total of £24.7m. But the vast majority of the newly issued shares were priced below the trading price at 140p. That’s roughly a 30% discount. I’m not surprised to see the Ilika share price fall by a similar amount.
The bottom line
Is the recent drop a buying opportunity? I’m not so sure. While the share price dropped by almost a third, the valuation remains quite rich. It currently has a market capitalisation of around £220m versus a revenue stream of only £2.3m. To me, it looks like the stock is being significantly elevated by expectations rather than fundamentals.
Forecasts suggest revenue will increase substantially in 2023/24 as its large battery production ramps up. But there’s a lot that can go wrong in the meantime. After all, Ilika is not the only business exploring solid-state battery technology. And there’s some evidence to suggest that with nano-technology, lithium-ion batteries could be superior in the future, making this venture ultimately obsolete.
Personally, I think it’s too soon to invest in this business. And so, for now, it’s staying on my watchlist.