Battery maker Ilika (LSE: IKA) is hoping to power more and more objects as its sales grow. But one thing that seems to be lacking in power is the Ilika share price. It has tumbled 48% in the past year.
Although the price remains above the £1 level for now, Ilika has been moving closer to penny stock territory. Will it end up becoming a penny share?
Business momentum
At first glance, the share price slide may seem odd when set against the company’s business momentum. Ilika has set up a factory to produce its Stereax line of batteries. It is in the process of making sure the factory works as hoped. It should start commercial sales fairly soon.
On top of that, the company is also making progress with its Goliath line of products. It has continued to improve the design and is now planning how to manufacture the batteries at scale.
However, this progress with research and manufacturing has not yet translated to improved finances. In fact, revenue in the company’s first half fell to just a couple of hundred thousand pounds. But the loss before interest, tax, depreciation and amortisation increased to £2.7m from £1m in the prior year period. For now, Ilika has enough liquidity to tide it over even when making losses. Its last reported cash balance, at the end of October, was £27.7m.
The Ilika share price
Still, that cash balance has come at a cost to shareholders. The company raised around £25m last summer to prop up its finances, partly by diluting existing shareholders. If it keeps making losses, there is a risk it could dilute shareholders again in future.
I think the reason the Ilika share price has been falling is a revaluation of the firm’s prospects. Its technology is promising and progress towards commercial production is a positive step. But it has also meant that investors are no longer thinking of Ilika in purely theoretical terms when it comes to business potential. Instead they are starting to think about how the company can build its sales capability, how much more funding may be needed by the company to fund its growth plans and also whether increasing competition could put profit margins under pressure in future.
So while Ilika continues to have attractive technology and is moving closer to selling its products in large amounts, its financial model remains a matter of concern. The market capitalisation of £185m still looks high to me for a company at its stage of development.
Penny share
Based on that, I would not be surprised if the Ilika share price keeps falling. I could see it fall beneath £1 in the coming year, especially if there is bad news, like an unexpected delay to production or poor sales figures.
If Ilika becomes a penny share, it would simply put the price back where it used to be. Until 2020, it had traded as a penny share for most of the time it had been listed on the stock market. It still would not tempt me in, though. I do like its technology and reckon it has promise. But the company simply does not have the sort of proven business model I feel most comfortable with when buying new shares for my portfolio.