Shares in hydrogen energy group ITM Power (LSE: ITM) have risen by more than 1,100% over the last year. Yesterday’s market slide had little impact on that big gain. But with the share price down by nearly 60% in 12 months, investors may be wondering whether the stock will ever regain its former highs.
I’ve been taking a fresh look at ITM as a possible buy for my portfolio. Should I pick up some stock today, or could the shares have further to fall?
Hydrogen: the right time?
The world’s largest market for hydrogen is ammonia production (used in fertiliser). At the moment, the hydrogen used here is mostly produced by burning gas.
ITM makes electrolysers that can generate so-called green hydrogen by using renewable electricity instead of gas. The company’s hope is that buyers will switch to ITM equipment in order to decarbonise their operations.
This group is already working with a number of large industrial partners in large-scale trials. Long-term partners include Shell and German chemicals giant Linde, which is also ITM’s largest shareholder.
More recently, a deal with Norwegian fertiliser group Yara will see ITM supply a 24MW electrolyser for the company’s Porsgrunn plant. The ITM system will generate around 10,000kg/day of hydrogen, or about 5% of Porsgrunn’s daily consumption. It’s expected to reduce carbon emissions by 41,000 tonnes per year.
Why I like ITM
ITM is hoping to target newer markets for hydrogen, such as transportation. But one thing I really like about the group’s business is that existing markets for hydrogen already provide plenty of growth opportunities.
If the firm can deliver green hydrogen reliably at a reasonable price, I’m confident industrial customers will buy its equipment for their existing operations. This is more attractive to me than a business which relies on unproven hydrogen markets such as aviation or shipping.
I’m also encouraged by ITM’s roster of heavyweight industrial partners. This tells me the group’s technology is seen as credible, with commercial potential.
Why has ITM’s share price been falling?
Valuation has been the reason why its share price has suffered. When the ITM share price peaked at over 700p last year, the group’s market-cap reached nearly £4bn. In my view, this was just too much. After all, ITM only generated £8m of revenue over the 12 months to 30 October.
Today, it has a market-cap of £1.4bn. The company is building a second factory, and management says backlog of orders and bid opportunities are now worth £473m, up from £408m a year ago.
Are ITM shares cheap at this price? It is hard to say. Using any standard valuation metric, the stock still looks expensive to me. For example, forecast revenue for the 2022/23 financial year is just £61m. That values ITM at 23 times forward sales (with no profit).
However, I think there’s a chance this business will deliver rapid growth as its technology and manufacturing facilities mature.
ITM isn’t cheap enough for me to buy yet. I’m not comfortable with the risk/reward balance and my feeling is that the stock may have further to fall. Even so, on a long-term view, I think it’s possible that ITM shares could deliver gains from current levels.