ITM Power (LSE: ITM) shares have taken a big hit recently. A year ago, they were changing hands for around 350p. Today however, they can be picked up for less than 100p.
Is this a good opportunity to buy the popular renewable energy stock? Or are ITM Power shares a risky proposition from here? Let’s take a look.
An exciting growth market
I can see why a lot of investors are bullish on this stock. ITM Power specialises in hydrogen energy solutions and the market for such solutions – which can be used refuel vehicles, heat homes, and power industrial processes – appears to be vast.
According to Precedence Research, the global green hydrogen market is set to be worth around $90bn by 2030, up from less than $2bn in 2021. That equates to annualised growth of more than 50% per year, which is huge.
Meanwhile, ITM has partnered with some major players in the industrial/energy industries including Linde, Shell, and Orsted. So it appears to have a lot going for it.
Share price risk
But digging deeper, there are a number of issues that concern me from an investment perspective. One is that the company has a history of disappointing on the revenue front.
When I last covered the stock in October, City analysts were expecting revenue of £37m for this financial year and £87m for next. They now expect revenues of £25m and £47m respectively. They’re big downgrades. When the company warned on revenue in October, the stock fell 35%.
It’s worth noting here that in December, the company announced it was deferring its planned trading update to provide new CEO Dennis Schulz sufficient time to assess the company’s operations. However, it could also indicate the company is experiencing some more revenue challenges.
High valuation
Another issue for me is that the valuation remains high. ITM Power is not profitable (which adds risk in itself) so it doesn’t have a price-to-earnings (P/E) ratio. But it does have a price-to-sales ratio and that’s currently about 24. That’s a lofty multiple and adds risk to the investment case.
Short sellers are sniffing around
Perhaps the biggest issue for me is that the stock is being aggressively shorted by hedge funds right now (meaning that they’re betting against it).
Data from the Financial Conduct Authority (FCA) shows ITM Power currently has short interest of 5.9%, making it the second most shorted stock on the London Stock Exchange.
However, this data only focuses on short positions reported to the regulator. My research tells me that the real short interest figure is closer to 12% as around 52.4 million ITM shares are on loan at present. To me, this is a big red flag as short sellers typically do their research.
It’s worth pointing out that the short sellers made huge profits last year shorting more speculative renewable energy/decarbonisation stocks. I wouldn’t bet against them.
My view on ITM Power shares
Putting this all together, ITM Power shares appear to be a risky bet right now. So, personally, I wouldn’t buy them.
All things considered, I think there are better growth stocks for investors to buy today.
