Alternative energy is a popular investing theme at the moment. With ongoing shocks to energy demand and supply, as well as an increasing focus by some people on the environment, I think alternative energy will grow in importance. Two UK companies in this sector are Ilika (LSE: IKA) and ITM Power (LSE: ITM). Here I want to consider whether either the Ilika or ITM share price represents a potential bargain for my portfolio.
One problem, two solutions
Although both are alternative energy companies, they have different technical perspectives. Ilika is focussed on developing solid state battery technology. That can help store energy for users such as electric vehicle drivers. ITM Power is focussed on hydrogen as an energy source. So far its focus is more on industrial than consumer applications, although that could change down the line.
I see a wider variety of possible applications for solid state batteries, whereas hydrogen energy is just one more possible energy source among many. But I think it is too early to say with any confidence whether either of the two approaches is likely to end up with large, enduring market demand.
Valuation collapse
Ilika’s market capitalisation of £120m is less than a tenth that of ITM Power, which commands a valuation of £1.4bn. Ilika is also a much smaller business. In its interim results, it reported revenue of just £0.2m compared to £4.2m at ITM Power. Neither is a big number, especially when one considers the market capitalisations of the two firms. But that is not unusual among early stage companies. Initially, revenue can be low as the technology is perfected and commercialised. But hopefully down the line it ramps up. Both Ilika and ITM Power now have their own commercial scale factories and are working to build growing sales pipelines.
Over the past year, Ilika has seen its share price fall by 50% while ITM Power has dropped even more, tumbling 55%. I think these prices reflect valuation concerns among investors. Both companies have promising technology, but they still have a lot of work to do to scale them commercially. They also need to prove that they have a viable business model. For now, both are loss-making. If the technologies prove attractive, I expect competition to get fiercer. That could be bad for future profit margins at the companies. Losses could continue for years to come.
My move on the Ilika and ITM share prices
The share prices at each of these alternative energy companies has tumbled in the past year. Both have promising technologies that could yet form the basis of substantial businesses. But for now, revenues remain low and there are no profits in sight.
I feel it is too early to say whether either Ilika or ITM will make it into the big time as the alternative energy industry grows. So even after the share price falls, I continue to see both shares as too speculative for my portfolio at the moment. The two companies trade at a huge multiple to sales, let alone earnings. So I do not regard either share as a bargain. I will not be adding them to my portfolio.