Renewable energy stock: why I’ve bought ITM Power shares

Investors in ITM power Shares (LSE: ITM) have certainly felt the shift in investor sentiment recently. Hydrogen stocks down 86% in two years!

However, I think this current drop in share price makes ITM Power’s risk reward proposition more attractive to me. So I have started a small position in the stock.

Srabbit price correction

From 2018 to 2021, ITM Power shares went from 40p to 682p. Today, they are back to 98p. That still leaves the stock up 147% in five years.

But the full-year revenue for 2022 was £5.6m, not dramatically above the £3.3m posted in 2018. Meanwhile, losses have ballooned from £6.5m in 2018 to £46.7m last year.

Its current market capitalization stands at £606m. So, even though the stock price is down, the stock has a price-to-sales (P/S) ratio of 108.

The company needs to increase its sales dramatically to start justifying its attractive price. But it is ‘cheaper’ than it has been in years.

Exciting technology

Using hydrogen for energy purposes is not a new idea. In the 1875 novel Mysterious Island, Jules Verne envisioned hydrogen one day replacing coal as a fuel. These elements will be separated from the water to “providing an inexhaustible source of heat and light“.

ITM Power technology is now helping to turn this fiction into reality. how? Yes, hydrogen is abundant in the universe, but it is most commonly found in water. The ITM energy system makes it possible to separate hydrogen from oxygen in water using electricity (ie, electrolysis).

So using only water and renewable energy, PEM electrolysis can produce green hydrogen. This has the potential to provide clean energy for manufacturing, transportation, and more. The only by-product is oxygen, which can also be reused by industry or discharged into the atmosphere without negative environmental impact.

In theory, the technology is perfectly positioned to help the world decarbonise and achieve net-zero.

Gale-force tailwind

It is now clear to me that the tailwinds for renewable energy are very strong. China has announced its ambition to reach net-zero to reduce global warming by 2060.

Meanwhile, the US has announced the first Energy Department “Earthshot” for green hydrogen. In the UK, the government has set a target of doubling low-carbon hydrogen production to 10 gigawatts by 2030.

So the global demand for electrolysers to decarbonise the production process must accelerate. The market opportunity is always there. It’s just what the company’s core technology holds and what management capitalizes on the opportunity.

That remains uncertain at this time.

New leadership

In November, the company appointed Dennis Schulz as its new CEO. He has moved from Linde Engineering, where he gained significant experience in the hydrogen market and green decarbonization. So on paper, this looks like a good appointment.

He will replace Dr Graham Cooley, who served as CEO for 13 years. He led ITM Power through its transition from an R&D business to a revenue-generating manufacturing company. It is expected that the new CEO will lead the company through the next transition, from a loss-making company to a profitable company.

How long that takes – and whether it will happen – makes investing in this stock risky. So, it will remain a small position in the speculative side of my portfolio.