Hydrogen energy specialist ITM Power (LSE: ITM) has been disappointing for shareholders over the past year, losing 14% of their value. But in the past fortnight or so, the shares have soared by 66%.
What is going on with the ITM Power share price?
No obvious news flow
There is no obvious business reason for the share price surge that I can see. The company has not announced any big business developments or contract wins over the past few weeks. The last such news came in late January, with the sale of an electrolyser for a power station in Norway.
Nor was there any notable director purchases of shares lately, although there have been some small purchases through an employee share incentive scheme. The last substantial director buys of ITM Power shares on the open market were last year.
So I reckon the most likely explanation for the surge in the ITM Power share price over the past couple of weeks is that energy security concerns from the war in Ukraine have led investors to put money into possible alternative energy sources. As the Norwegian sale demonstrates, ITM Power could be seen as being able to supply an alternative to oil and gas.
Is the ITM Power share price surge justified?
If that is indeed the reason for the price surge, it seems pretty speculative to me. After all, ITM Power’s business looks pretty much the same as it did last month. While there may be an increase in demand for hydrogen energy in future, I think that was already priced into the share price. Its whole business model has relied on increased future adoption of hydrogen energy by its target customer base, after all.
A 66% increase is not a small boost. It suggests a radical revaluation of a company’s business prospects. But I already felt the share price was hard to justify before the surge. Now, the loss-making company has a market capitalisation of £2.3bn. But last year it only had sales revenues of £4.3m and it reported losses of £27.7m. To me, the price already looked stretched before the latest move up. It looks even more overvalued now.
My next move
A 66% increase in a couple of weeks could offer an incredible return for a shareholder. But I am an investor, not a speculator. So I do not try to time the market or jump in and out of shares on a short-term basis expecting a share price swing.
Instead, I try to find companies with proven cash generative business models that are trading at attractive valuations. From a positive perspective, ITM Power does have promising technology in an industry that might see a demand boom in coming years. That could help it boost its revenues. Economies of scale might turn its sizeable annual loss into a profit.
For that to happen, though, a lot needs to go right. Given its small revenues, largely unproven commercial strategy and lack of profitability, I think the company’s market capitalisation is too high to justify. What goes up quickly can sometimes come back down just as fast. Despite the surging share price, I will not be buying ITM for my portfolio.