Earnings: why ITM Power shares are climbing

ITM power (LSE: ITM) shares gained 10% on Tuesday afternoon, on the back of the company’s first half results. That’s just the latest in a story of volatile stock prices, though. So, are we about to enter a new and sustainable phase of growth?

Hydrogen energy companies experienced explosive growth the past few years, and investors pushed their stock prices to record highs in early 2021. However, since the peak of that initial growth bubble, we’ve seen an 87% decline.

Even with the spectacular ups and downs, investors who bought ITM Power shares five years ago will have their pants kicked. FTSE 100 tracker index. During that time scale, ITM is still up 157% while Footsie has gained 3.8%.

It is difficult to calculate the stock, with the company constantly losing money. And when we have the warning that we are set to underperform and lose more than expected, early investors dump their shares and run away.

Face reality

What’s good about the latest update? For one thing, I was struck by his delightful honesty.

Chairman Sir Roger Bone admitted: “We are raising capital to pursue an expansion strategy and thereby underestimating the competencies and capabilities needed to scale and transition from an R&D company to a volume manufacturer. As a result, we set unrealistic targets for project completion.”

ITM appointed new CEO Dennis Schulz in November, and is focusing on its core business. He told us “I believe that ITM technology can beat the competition. However, the product focus should be significantly reduced“.

Very fast

Too many tech startups try to expand too quickly, raise fresh capital each time, and ultimately fail to identify the key underpinning of success. It’s cash flow. What goes in, and what goes out, can kill even the most promising opportunity if the balance is wrong.

ITM expects to record a full-year adjusted EBITDA loss of between £85m and £95m, which is huge. But it also reckons it should have £245m to £270m in net cash on the books by the end of the year.

That should keep the company going for a while. But we need profits to grow significantly if we’re going to make a profit before the money runs out. This year’s revenue should be around £2m, with some revenue now deferred to next year.

savings

ITM is exploring options for a Motive Fuels joint venture with Vitol. It may mean selling, or simply ceasing activity. Whatever the decision, the council hopes it will save around £28m which it can spend on its core business.

In many ways, it appears that investors are back to where they were a few years ago. This is a company with promising technology that I think might be in demand. But we don’t know when the first profit can come.

I rated ITM Power only for risk averse investors.