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Many companies are developing future clean energy sources and storage facilities. one of them, ITM power (LSE: ITM ), may be expecting more positive momentum in its share performance. But after bad news this week, ITM Power’s share price is now 70% lower than it was a year ago.
So should I invest in recovery? Or could there be more bad news for ITM shareholders?
Disappointing results… and a new CEO
The company’s share price fell this week after it posted disappointing results and announced the replacement of its longtime CEO, though not outright.
The results weren’t all bad. Revenue grew 30 percent last year. That’s impressive, although it’s still only £5.6m, which is small beer for a company with a market capitalization of nearly £700m.
But while the top line results improved, the bottom line was more of a concern. The company’s pre-tax losses rose 69% to £47m. This shows the financial challenges the company faces when trying to grow its operations.
I see a risk that it will continue to make significant losses in the coming years, resulting in further dilution for existing shareholders. ITM ended last year with a cash balance of £366m, so liquidity is adequate for the foreseeable future.
The company has significantly reduced the target production capacity of its main factory and plans for a second manufacturing plant. The spread of bad news hurt ITM’s share price.
Battery half-charged or half-empty?
The market reaction to the results caused investors to scale back their hopes for what ITM could actually achieve, and thus the valuation.
I see the results as a mixed bag. Basically, costs were terrible, although continued revenue growth was a bright spot. If the company’s valuation wasn’t so high, I would view the sales trend as positive. But the expected high weight of market capitalization can make it easy to forget that.
The company should improve its financial model. Balanced back product plans can be a sign that you plan to do just that. However, they could signal the beginning of a reduction in their ambitions for the company, which I think could further hurt ITM Power’s future value.
Can ITM Power’s stock price recover?
If that’s the case, ITM shares won’t be able to regain their previous highs. It has a comfortable liquidity cushion, but if it fails to make strong trading progress before liquidation, investors may not want to pony up cash for more shares.
From this perspective, I think the high cash burn and reduced production targets mean that ITM will struggle to survive as a viable company in the long run. If the company cannot find a way to profitability or more investment, it may disappear in the long run.
I may be wrong about this. Of course, it’s not gone yet. ITM has promising technology, growing sales, large cash reserves, and could also benefit from new leadership. But I see a lot of risk here, so I won’t be adding the shares to my portfolio.