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2023 has not been an easy year for hydrogen energy pioneer ITM Power (LSE: ITM). With a new chief executive, changed strategy, job cuts and weak sales outlook, the company has had a turbulent ride. That helps explain why the ITM Power share price has tumbled by a quarter this year.
Still, it has more than doubled over the past five years. That reflects the long-term promise some investors continue to see in the firm’s technology.
Given that it continues to commercialise that technology and now has a more viable looking business strategy than it has had for years, could ITM see its share price jump in coming years?
Concerns priced in
Arguably, the concerns investors may have about the company’s prospects are already priced in.
After all, the shares have fallen around 90% since their 2021 highs. The new strategy seems like a sensible approach to focusing on what is working best and has strong potential. It should reduce costs and bring more financial rigour to the company’s sales process.
On the other hand, despite the 90% fall in the ITM Power share price, the business still has a market capitalisation of £450m.
The business expects to end this year with £245m-£270m in net cash. But the valuation still looks high for a business that expects to generate just a few million pounds in revenue this year and has been consistently loss-making.
Possible price drivers
Those hefty losses concern me. Last year, the firm lost £47m after tax.
Cutting costs could certainly help the business reduce the red ink, but I expect it will still be in the red in coming years.
But the cost base is only part of ITM’s challenges. The more pressing question, in my view, is how to grow its revenues. If it can ramp up sales fast enough, it would have bigger revenues over which to spread fixed costs. That alone could improve the prospects for profitability.
It is not yet clear how successful the new strategy will be in delivering such a sales uplift. Indeed, a focus on streamlining the product portfolio and focusing on profitable sales could hurt and not help revenues in the short term.
I still think those moves make strategic sense for the business. But the vital next step will be figuring out how to grow sales volumes – and fast.
Too early
For now I do not see enough evidence that the company has a clear and well-devised plan of how to do that. That on its own helps explain why the ITM Power share price has been moving downwards.
Until there is good news about sales, I see no reason for the shares to jump. At some point, if the company can show concrete evidence that sales revenues are set to increase both strongly and quickly, I think the share price could boom again. But such news has not come yet – and it is not clear if it ever will.
Meanwhile, as time ticks on and the company continues to burn cash, I think the shares could keep moving down. For now, I have no plans to invest.
