ITM Power (LSE: ITM) stock has been on my radar for some time now. The green hydrogen company is backed by Linde (the world’s largest industrial gas company) and construction equipment maker JCB. It’s positioned at the heart of global efforts to decarbonise fuel and energy, so the potential of the company is enormous.
However, potential alone doesn’t cut the mustard in today’s market, and the share price is down a massive 84% over the last 12 months. Is this drop an overreaction or is it warranted?
Cutting-edge technology
ITM Power is headquartered in Sheffield, England, where it manufactures PEM electrolyser systems that help decarbonise various industries by harnessing the power of green hydrogen. These systems can be used by its customers for clean energy storage.
Hydrogen is the most abundant element in the universe. It’s light and can be stored for long periods. It emits only water and helps combat climate change. Proponents of green hydrogen say it can help decarbonise heavy industries such as steelmaking, chemicals and transport.
According to a Goldman Sachs‘ report, this gas could supply up to 25% of the world’s energy needs by 2050. The report predicts a $10trn dollar market for hydrogen halfway through this century.
That’s all well and good, but will ITM Power start producing any profits in the meantime so it’s still around in 2050?
The bad news
Nobody really knows. The company spooked investors last week after warning that it’s behind schedule in the development of its newest range of products. That means its full-year product revenue is likely to be towards the lower end of its guidance, which stands at £23m-£28m.
Due to the delays, the company needed more testing at its customers’ end to determine the correct warranty provisions for the new products. Management admitted it was unsure of its total warranty liability exposure, which “may result in a revision to EBITDA loss guidance”.
This means losses are probably going to be higher than expected this year. But the company is unsure by how much. This uncertainty was the root cause of the stock’s 32% drop the day all this was announced.
It hasn’t helped that long-standing CEO Dr Graham Cooley has announced he’s moving into a strategic advisor role. This leaves the company searching for a new leader at a crucial stage in its development. This is far from ideal.
Is this an overreaction?
Despite the risks relating to its warranty provision, I suspect this sell-off may be an overreaction. The green technology company still sees itself delivering 48MW-65MW of its products by the end of the year. And it actually has a backlog of customer orders. So I think the growth story is still very much alive.
Plus, the firm still expects to have £240m-£270m on its balance sheet at the end of the year. This means the company shouldn’t have to raise money any time soon. But the cash burn situation does remain cloudy for now.
Still, with a market cap of £502m after its 80% plunge, the stock now looks attractive to me. In fact, I’m ready to open a small starter position in it.