It’s been a calamitous few months for the ITM Power (LSE: ITM) share price. The business — which manufactures ‘green’ hydrogen fuel cells — has halved in value in less than three months. It now trades at around 254p.
Rising fears over ITM’s losses have prompted investors to heavily sell their holdings in the business. But are shareholders being a bit premature in heading for the exits? After all, forecasters think that demand for green hydrogen could explode over the next decade. Does ITM Power’s sinking share price provide an attractive dip-buying opportunity for me?
Revenues leap…
Let’s briefly talk about late January’s latest trading statement. In it ITM revealed that losses before tax increased to £15.3m in the six months to October. This was up from £12m in the same 2020 period.
Pleasingly revenues at ITM recovered strongly from a year before when Covid-19 restrictions hit. These totalled £4.2m in the first half versus just £200,000 the year before. However, this wasn’t enough to offset its considerable operating costs and expenses related to the scaling up of its business, resulting in that widening loss.
… but when will it turn a profit?
City analysts are expecting sales at ITM to continue booming as the adoption of green hydrogen technology surges. Revenues of £4.3m in the last fiscal year (to April 2021) are predicted to shoot to £21.3m in the current period.
This isn’t the end of the story either. Sales are expected to soar to £61.6m next year and then to £129.4m in financial 2024.
The problem for investors, however, is that ITM isn’t actually tipped to make a profit any time soon. Pre-tax losses — which clocked in at £27.5m last year — are expected to exceed £30m for the next three years at least.
ITM’s share price: too cheap to miss?
The global market for hydrogen could be massive. Boffins over at the Hydrogen Council and the IEA believe demand could rocket to between 500m and 550m tonnes per annum by 2050. That compares with the 90m tonnes of the gas that Jefferies researchers estimate is currently used each year. Consumption of the more environmentally-friendly green hydrogen that ITM specialises in could be particularly strong as the battle against climate change heats up too.
ITM Power could well deliver blockbuster profits growth against this backcloth. I’m certainly encouraged by the way the business is stacking up contracts (its contract backlog soared 206% in the year to October, to 499 MW).
But the competing (and in some cases more unique) green hydrogen technologies offered by rival operators could well derail its plans to make monster profits. In fact I’m worried that its huge costs mean it won’t be generating any sort of profit in the near future. This means I also have to consider the possibility that it might issue shares or take on debt to try and grow the business.
I believe that the company has plenty of potential. But then it also carries lots of risk for investors. So despite the slide in ITM’s share price I don’t plan to invest any time soon.
Royston Wild 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.
