The ITM Power (LSE: ITM) share price has risen this morning after the hydrogen power company said it had secured a €32m EU grant to build a “world-leading” 100MW electrolyser in Germany.
Today’s update seems like good news to me, but shareholders will be painfully aware that ITM’s share price has fallen by 50% from the highs seen earlier this year. Are the shares now a potential bargain buy for my portfolio? I’ve been taking a closer look.
Heavyweight supporters
Industrial heavyweights Royal Dutch Shell and Linde both seem to agree with my view of ITM’s potential. Both companies are its long-term partners. Linde owns 17% of the business while the Refhyne II project, announced today, will be built at Shell’s Rhineland Refinery in Germany.
Equally, I’d guess that many private investors will be encouraged to see some well-known UK business people on ITM’s shareholder register. Digger maker JCB (chaired by Lord Bamford) owns 9.3% while Hargreaves Lansdown founder Peter Hargreaves owns 5.2% of the business.
However, it’s worth remembering that both Bamford and Hargreaves bought their ITM shares at much lower prices. JCB’s initial investment was made at 30p per share in 2015, for example. The share price, as I write, is 383p.
Similarly, the amounts invested so far by Shell and Linde aren’t significant in their accounts. Large industrial businesses like these will invest in a number of interesting opportunities every year. Not all of these will be successful, but they provide early access to new technology. That’s useful for Shell and Linde — but it doesn’t help me.
ITM share price: ahead of reality?
Hydrogen stocks have soared over the last couple of years, but their valuations aren’t (yet) justified by results. In my view, this is why ITM’s share price has fallen so hard. Investors are recognising that most hydrogen businesses are still a long way from profitability. Some won’t succeed.
ITM generated just £4m of commercial revenue last year. In September, the contracted order book stood at just £36m. Even the group’s bidding pipeline — the most optimistic measure I can find — was only £378m.
When I look at these numbers, ITM’s £2.1bn valuation doesn’t make sense to me. Sales of modular refuelling systems to fleet operators and service stations are only just getting started. Larger projects such as Refhyne II are still in the design phase.
My sums suggest ITM will need to deliver at least three to five years of solid growth to justify today’s share price.
My verdict
In my view, ITM’s share price is unlikely to return to 600p for the foreseeable future. I think the greater risk is that the shares could have further to fall. For this reason, I won’t be buying ITM stock at current levels, even though I like this business.
Instead, I’m going to keep watching this interesting sector and learning more about hydrogen. I reckon I could make some money here — just not yet.