The energy storage company, ITM Power (LSE: ITM), has seen its share price move up sharply in recent weeks. The ITM share price has increased around 32% from its lows last month, at the time of writing. Over the past year, the shares have surged 66%.
That is an impressive performance – but can it continue?
Good news for ITM
The positive momentum lately has partly reflected good news for the company. In the past couple of weeks alone, the company has announced that it has inked a deal to supply 12MW of electrolysis equipment for deployment next year and that it has reached agreement on buying a site for its second factory. Investors cheered this news as suggesting that the company is stepping up its commercialisation push and could soon expand more quickly.
Meanwhile, the company has been taking advantage of positive sentiment to increase its funds, with a £250m capital raise announced last month. ITM has attractive technology and its growing manufacturing footprint could help it scale up, so many investors like the story.
Valuation concerns
Nonetheless, I continue to see ITM Power as overvalued.
The market capitalisation now stands at over £3bn. But last year, total revenue and project grant funding was just £5.1m. That was actually a slight fall from the prior year. It also means the company is now valued at almost 600 times its revenues. That is a stretched valuation in my opinion.
At its year-end, the company’s contracted backlog stood at £36m. That was more than double the amount at the same stage the prior year. But I still see it as a small amount for a company with a £3bn market cap.
The company continues to be loss-making. In the first quarter of its current financial year, the loss from operations increased to £6.3m. It has ample liquidity, so I don’t see that as a concern in the short term. But the company’s liquidity is a result of it repeatedly raising money over the years in share issues that have diluted existing shareholders. There is a clear risk that future capital needs could lead to further shareholder dilution.
I think the ITM Power investment case right now is more about its future prospects than its proven success. But for a company with its market capitalisation, I would hope for a clearer pathway to large-scale commercialisation and profitability. While ITM clearly has some commercial momentum right now, I continue to see a disconnection between the company’s market cap and what I think would be a reasonable valuation.
Where next for the ITM Power share price?
The shares obviously have fans and have benefitted recently from positive momentum. I think that alone could help the ITM Power share price continue to increase in coming months. On a fundamental basis, though, I see the shares as overvalued so reckon they could be marked down at any moment. Whatever happens in the short term, taking a longer-term view I remain bearish on prospects for the shares.
I definitely won’t be investing. I would prefer to put my money into a company with a more clearly demonstrated large-scale commercial capability and a less frothy looking valuation.