The price of ITM Power (LSE: ITM) shares has fallen 79% in the past 12 months. And since an all-time high in January 2021, we’re looking at an 87% drop.
That 2021 high did mark the end of a massive bull run though. And even after the subsequent collapse, the shares have still more than doubled over the past five years.
This often happens with promising growth shares. We see an initial surge, then investors get cold feet and the price reverses. At that point, it can be a great time to get in for a second upwards run, often more strongly sustained. Are we at that point with ITM Power shares now?
High tech growth
ITM Power manufactures high-tech things called PEM electrolysers, for making hydrogen for energy storage. They can be used, for example, at times of peak electricity production. And unlike some other forms of storage, the ITM Power method is itself clean. Combined with renewable energy generation, we have a clean production and storage method.
Both the UK and the European Union are heavily into hydrogen use for energy storage and provision. And the UK government wants to double the country’s hydrogen production to 10 gigawatts by 2030.
Revenue growth
So the demand for ITM Power’s technology seems to be there. And with the latest full-year results in September, we saw steady revenue growth.
Back in 2020, the company reported £3.3m in revenue. A year later, that was up to £4.3m. And this year, it reached £5.6m.
So here’s what I think I’m looking at. It’s a company with a successful technology that could well be in great demand in the coming decades — we’re already seeing rising revenues now. And I reckon there could be some very tasty profits in the years ahead.
Profit
But that’s where things start to come unstuck for me. There’s no profit now, and there’s none on the cards in the next few years. Analysts expect revenue growth, yes. But nobody has offered any indication as to when profits might arrive.
I think there’s a very good chance it will happen, but my big concern is dilution. Who will own the bulk of the company when the day comes? It’s all down to how much cash the business might need to reach profitability, with any possible new share issues diluting existing investors’ holdings.
For now, it’s all about cash flow. At 30 April, ITM Power had a cash balance of £365.9m. And it reported cash burn for the year of £53.3m. That suggests there could be enough cash for nearly another seven years. But the latest cash burn was 40% higher than the previous year, and who knows how high it might go?
Verdict
I’m drawn to ITM Power as I see it as a promising long-term growth investment. And though I invest mostly for dividends these days, I do like the occasional growth stock too.
I just find this one too risky, because there’s no profit and I have no handle on when it might happen. For that reason, I’ll look elsewhere for my next growth investment.