ITM Power (LSE: ITM) shares have recently delivered disappointing returns. While the hydrogen energy stock is still up about 140% over the last year, it’s fallen nearly 50% since 27 January when it hit an all-time high of 725p.
Is this share price pullback a buying opportunity for me? Let’s take a look at the investment case.
ITM Power shares: the bull case
I can see why ITM Power is a popular stock at the moment (last week, it was the most purchased stock on Hargreaves Lansdown).
For starters, it operates in a high-growth industry. According to Grand View Research, the global green hydrogen market size is expected to grow at a compound annual growth rate (CAGR) of 14.2% from 2020 to 2027.
Meanwhile, according to Goldman Sachs, green hydrogen is a “once-in-a-generation opportunity.” It estimates it could give rise to a €10trn addressable market globally by 2050 for the utilities industry alone. This market growth should provide tailwinds for ITM Power.
Secondly, ITM has signed deals with some major players in the industry. Already, it has formed partnerships with multinational chemical company Linde (the largest industrial gas company by market share and revenue), Italian energy infrastructure company Snam, energy powerhouse Royal Dutch Shell, and Scottish Power. These deals suggest the company’s technology has significant potential.
Third, the company has received some encouraging coverage from brokers. In February, for example, JP Morgan initiated coverage of the stock with an ‘overweight’ rating and a price target of 700p (80% higher than the current share price). Meanwhile, Barclays has also initiated coverage of the stock with another ‘overweight’ rating, saying the stock should reflect the growth potential of the green hydrogen industry over the next decade.
Overall, the growth story looks quite exciting.
The bear case
However, I do have a few reservations about ITM Power shares. One is that the company is still very speculative in nature right now. This is illustrated by the fact that for the six months to 31 October 2020, the group posted revenue of just £0.2m (down from £2.4m a year earlier). It also posted a loss from operations of £12m (up from £9.8m a year earlier).
It’s worth noting ITM Power isn’t expected to be profitable in the near future. For the year ending 30 April 2022, analysts expect the group to post a net loss of £16.5m. This adds risk to the investment case. Company stocks that aren’t yet profitable tend to be highly volatile (and often turn out to be poor investments).
Another concern is the valuation. At its current share price, ITM Power has a market-cap of about £2.2bn. That looks way too high to me. For the year ending 30 April 2022, analysts expect the group to generate revenue of just £31m. That puts the stock on a forward-looking price-to-sales ratio of about 70. That’s over five times more expensive than Tesla, which is generally considered to be a very expensive stock.
ITM Power shares: my move now
Weighing everything up, I won’t be buying ITM Power for my portfolio. In my view, the stock is too speculative and the valuation’s way too high.
All things considered, I think there are much better growth stocks I could buy today.