A lot of companies are developing clean power sources and storage facilities for the future. One of them, ITM Power (LSE: ITM), might also be hoping for more positive power in its share performance. But after bad news this week, the ITM Power share price is now over 70% lower than it was a year ago.
So should I invest for recovery? Or might there be further bad news for ITM shareholders?
Disappointing results… and a new CEO
The firm’s share price fell this week after it released disappointing results and announced the replacement of its long-standing chief executive, although he will not be leaving altogether.
The results were not all bad. Revenue last year grew 30%. That is impressive, although it was still only £5.6m, which is fairly small beer for a company with a market capitalisation of almost £700m.
But while the topline results improved, the bottom line was more concerning. The company’s loss before tax ballooned 69% to £47m. That shows the financial challenges the company faces as it tries to scale up its business.
I see a risk it will continue to make sizeable losses in coming years, which could lead to further dilution for existing shareholders. ITM did end last year with a cash balance of £366m though, so liquidity is ample for the foreseeable future.
The company also scaled back the target production capacity of its main factory considerably, as well as putting plans for a second production facility on hold. The raft of bad news hurt the ITM share price.
Battery half-charged or half-empty?
The market reaction to the results suggested that investors have scaled back their hopes for what ITM can realistically achieve and thus its valuation.
I see the results as a mixed bag. Basically, they were terrible when it came to costs, although continued revenue growth is a bright spot. If the company’s valuation was not so high, I would see the sales trend as positive. But the high weight of expectations implied by the market capitalisation it can be easy to forget that.
The company needs to improve its financial model. Scaled-back production plans could be a sign that it plans to do that. However, they might also mark the beginning of a reduction of ambition for the firm, which I think could further hurt the future ITM Power share price.
Can the ITM Power share price recover?
If that is the case, ITM shares may never recover their former highs. It has a comfortable liquidity cushion but if it cannot make strong commercial progress before that runs down, investors may not want to stump up money for more shares.
In that sense, I think the high cash burn and reduced production targets could mean ITM will struggle to survive as an independent company in the long-term. If the company cannot find a path to profitability, or further investment, in the long term it could be doomed.
I may be wrong about that. Certainly, it is not yet doomed. ITM has promising technology, growing sales, a sizeable cash pile, and may also benefit from new leadership. But I see a lot of risks here, so will not be adding the shares to my portfolio.
