Can the ITM Power share price climb higher? – The Motley Fool UK

The ITM Power (LSE:ITM) share price has had a rough start to 2021. Despite rising to its all-time high of 724p in January, the stock has since been on a downward trajectory. Today it’s closer to 439p. That’s around 40% less than a few months ago. Although it’s worth noting that it’s still up by nearly 80% over the last 12 months.

So, is this a buying opportunity? Or is it a sign of trouble ahead? Let’s take a look.

An exploding or imploding business?

ITM Power is a green energy technology company. Over the years, it has designed, developed, and patented a method of using electrolysis to extract hydrogen from the planet’s most abundant substance – water.

Traditional methods of acquiring high-quality hydrogen gas involve the use of fossil fuels, which is hardly an emission-free process. So when the UK government announced its Green Industrial Revolution that placed particular focus on using clean hydrogen, investor interest skyrocketed. In fact, this is one of the main reasons why the ITM Power share price exploded last year.

Recently the business published a trading update that generally looked impressive. After all, its contract backlog has jumped from £52.4m to £154.0m while its tender pipeline surged from £263m to £607m. That’s quite an astounding level of growth for such a small business, in my opinion.

However, it’s important to remember that only £35.4m of this revenue is actually guaranteed. The rest originates from unsigned deals and currently unsubstantiated offers from other businesses. It’s also worth noting that having an increasing backlog is only a good sign if the company can deliver on it in a timely fashion. But, the firm’s new Gigafactory should have more than enough capacity to handle the existing volume of orders.

Given this progress, why did ITM Power’s share price remain relatively flat on the news?

Idling share price

While seeing the demand for its technology rise is an encouraging sign, the actual tangible results achieved to date remain pretty lacklustre. Expected revenue for this year is a measly £4m. That’s a disappointing drop of 26% compared to a year ago – not something I like to see in a high growth stock.

However, beyond the disruptions from Covid-19, it seems this fall is mainly attributable to revenue recognition rules. Projects take several years to complete, and the revenue is only recorded once a contract has been finished. The guidance provided by the management team indicates that around 50MW of electrolysers will be produced by April 2022, 33MW of which is already in the contracted backlog. That roughly equates to £35m-£40m based on reported figures.

This is undoubtedly a significant improvement on £4m. However, even with this increased sales volume, the ITM Power share price still looks divorced from fundamentals. The firm’s market capitalisation current sits around £2.4bn. That places its forecast price-to-sales ratio at around 60! Combining this with the fact that ITM Power is unprofitable (and will likely remain that way for several years) indicates to me that the share price is being driven nearly entirely by shareholder expectations.

All things considered, the company looks like it could be at an inflection point. And if successful, then I do believe the share price could see some explosive growth over the long term. However, because its existing valuation is not based on fundamentals, should it fail to deliver for whatever reason, I wouldn’t be surprised to see it crash once again. Therefore, I’m still keeping this stock on my watch list for now.

Personally, I’m more interested in these green energy stocks…

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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