ITM Power (LSE: ITM) shares have experienced a massive decline recently. A year ago, they were changing hands for 392p. Today, they’re at 103p.
Is now a good time to snap up the hydrogen stock for my portfolio? Or is this a growth stock to pass on? Let’s take a look.
Exciting growth story
There’s no doubt that there’s an exciting long-term growth story here. According to industry experts, the market for green hydrogen and its derivatives is expected to grow by around 40% per year globally between now and 2030 as the world makes the shift towards renewable energy. This means ITM should have enormous tailwinds behind it.
It’s worth pointing out that here in the UK, the government published a hydrogen strategy in August 2021. This set out a target to double the UK’s hydrogen production to 10 gigawatts by 2030. Meanwhile, last month, the European Commission proposed €3bn in funds to facilitate hydrogen development in order to switch from a niche market to a mass market product. This is all very encouraging.
Looking at analysts’ forecasts, ITM Power is expected to grow at a rapid clip in the years ahead. This financial year (ending 30 April 2023) revenue is expected to hit £37m, up from £5.6m last financial year. The following year, the group is expected to generate revenue of £86.7m.
High-risk stock
Having said all that, the fact is that ITM Power remains a high-risk, speculative stock. For starters, the company is losing a ton of money.
Last financial year, its pre-tax loss surged to £46.7m, compared to £27.6m the year before. A year ago, when central banks were pumping billions into the financial system, investors were willing to ignore a lack of profitability.
It’s a very different story today though as the cost of capital has risen dramatically. And this is reflected in ITM Power’s share price. It’s worth noting that analysts don’t expect the company to make a profit any time soon.
Secondly, the company has a history of failing to meet analysts’ forecasts. When I last covered ITM Power in May, analysts were expecting the company to generate sales of £16.5m for the year ended 30 April. Yet ITM ended up posting sales of just £5.6m for the year. That’s an enormous difference. So we can’t really trust the sales forecasts for the years ahead.
Third, the company is currently looking for a CEO. Last month, it was announced that Dr Graham Cooley has decided to step down as chief executive after 13 years in the role.
As for the valuation, it still looks quite high, even after the big share price fall. At present, ITM’s market-cap is £629m, meaning it has a trailing price-to-sales ratio of 112.
My move now
Given the high-risk nature of the stock, I won’t be buying it any time soon. In my view, there are better UK growth stocks to buy for my portfolio today.