It has been a miserable five years for shareholders in renewable energy company ITM Power (LSE: ITM) and the share price has tumbled 73% during that period.
Could things get worse from here, or might this be a bargain price at which to add the share to my portfolio?
Business performance is getting much better
In January the company released its interim results.
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Revenues for the first half grew 74% to £15.5m and the company recorded a contract backlog of £135m. It has signed multiple sales contracts since the period under review ended.
Not only that, but at the end of October, net cash was £203m. in the months since then I expect it has got smaller. Still, the current market capitalisation of £175m is actually below what the company forecast its cash position would be when its financial year ends next month.
In other words, the market is effectively now placing no value on the company’s business including its impressive hydrogen energy storage technology.
With the finance boss dipping into her own pocket last month to buy some shares, I am wondering whether at its current price ITM might be a bargain for my own portfolio.
There’s one big question I still have
With revenues growing, I think ITM has a foundation on which it could build and succeed.
Bigger turnover can help absorb fixed costs, an important step for a company as it grows and seeks to move from heavy losses to breaking even. If it can break even, I reckon the share price could move far above where it stands today, possibly back to where it used to be and even beyond.
But despite that, I am not ready to invest yet.
The reason for that is simple: profitability. It has long been elusive for ITM — and that remains the case.
Yes, the company’s interim results included exceptional items, which made thing worse than they may be in future. However, even before those exceptional accounting items, the loss from operations was as bad as in the prior year period. At £20.7m, it was very significant (and substantially larger than revenues).
ITM’s strategy of focusing on certain product lines and carefully controlling costs, combined with higher sales, ought to mean that losses get smaller. That may happen over time, but the first-half performance was not reassuring on this score.
The fact remains that this is a heavily loss-making business that continues to bleed cash. Until it proves that its business model can be profitable, I do not plan to invest.
I’m taking a cautious approach
If that happens, the ITM Power share price may leap, meaning I would need to pay more to invest than if I buy now.
That does not bother me, as I see risks in buying today given that ITM has still not proven the long-term viability of its business model to my satisfaction.
Once it does, it may merit a higher share price. For now, I think it merits a sizeable risk premium.
In my opinion, that helps explain why the stock market is effectively valuing the business at zero for now.
