The ITM Power share price has crashed. Time to invest?
The ITM Power (LSE:ITM) share price started 2021 with a bang, reaching its all-time high of 724p in January. But since then, it has crashed by around 50%!
Over the last 12 months, the ITM Power share price is still up by 120%. But what caused the recent sell-off? And should I be adding this company to my portfolio?
The crashing ITM Power share price
As a reminder, ITM Power is a hydrogen company that uses its proprietary electrolyser technology to extract the element in an environmentally friendly way from water. The traditional approach requires fossil fuels and emits a considerable level of greenhouse gases. So, this alternative approach is gaining significant popularity, especially with the UK government ramping up investment in renewable energy.
The combination of rising demand with improving performance led to the explosive growth of the ITM Power share price last year. So why is it now falling?
The catalyst that triggered the downward trajectory appears to be linked to its half-year report released at the end of January. Due to pandemic related disruptions, the company was unable to complete several projects on time. Since ITM Power is paid upon completion, its revenue for the six-month period collapsed by 92% to around £0.2m.
More recently, the company announced that its hydrogen refuelling segment will be spun off into its own business. This, in turn, sparked another sell-off from investors. Why? It seems there are growing investor concerns that ITM Power intends to sell off this division once the separation is complete. Although there has been no indication from the management team that this is the case.
Despite the recent behaviour of the ITM Power share price, the company appears to be performing relatively well. The missing project revenue was not lost, merely delayed. And so, by the end of April this year, an additional £3.1m arrived on the income statement.
The company has also commenced a new project with ScottishPower to build the UK’s largest electrolyser facility and begun preparations to expand its Shell refinery project by 100MW. At the same time, ITM Power signed new deals to sell electrolysers to Linde for its Austria project and Sumitomo for its Japan project.
As a result, city analysts have placed a forecast revenue of £32m in 2022. Comparing that to the total £3.29m revenue achieved in 2020 suggests an 870% increase in just two years! Needless to say, that’s an extraordinary level of growth potential. And if it can achieve it, then I think the ITM Power share price could climb much higher.
The bottom line
To me, it seems that the falling ITM Power share price is primarily being driven by short-term problems that aren’t a serious threat to the business. In my experience, this is a good indicator of a buying opportunity.
Having said that, the stock still looks too expensive. Even after the 50% reduction in price, the firm still has a market capitalisation of £1.9bn despite only generating £3.29m in revenue last year. Even if it manages to meet analyst expectations in 2022, that’s still a price-to-sales ratio of 60.
Personally, while I admire the business, I won’t be adding the stock to my portfolio today. I think there are far cheaper growth opportunities available elsewhere.
For example, this…
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Zaven Boyrazian does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.