Shares of Ceres Power have halved. Is it time to buy?

A bulb with a growing tree.

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Whatever things are Ceres power (LSE: CWR) may be good at heating up, its own share price is not one of them recently. Shares of Ceres Power have fallen 52 percent in the past year.

So, could this be the right time to add a fuel cell maker to my portfolio?

What is behind the decline?

Many tech stocks have seen their stock prices drop over the past year, so Ceres is far from alone in this regard. Investors are reassessing some of the valuations previously associated with tech stocks and considering how reasonable they are.

On top of that, Ceres’ business performance has not been impressive lately. First-half revenue and other operating income is expected to come in at £10m, down 42% on the same period last year. The company seems poised to remain loss-making. Losses after tax last year amounted to £21m.

The company currently has cash and cash equivalents of £221 million at the end of the first half. The drop in revenue isn’t as bad as it sounds either, as it reflects the timing of contracts rather than a fundamental deterioration in the business. Still, in itself, it reflects how dependent the company currently is on a very limited customer base.

Against this, can Ceres Power’s shares justify their combined value of over a billion pounds?

Valuing Ceres Power shares

I don’t think they can. I value stocks using either the price-to-earnings ratio or the discounted cash flow model.

For now, Ceres’ earnings are worthless because it has incurred losses.

What about cash flow? In short, I think it is too early to say. The future demand for Ceres-type fuel cells may be large, but again, it may be overtaken by other technology over time. If they become popular, Ceres’ early work on them may help them grow faster. Or a late entrant to the market may outspend the early players. On top of that, the economics of Ceres’ business model once scaled up remain elusive.

With so many variables, I think it’s impossible to make a meaningful estimate of Ceres’ future cash flow.

Why am I waiting?

Down the line, then, Ceres Power could turn into a large and successful business. I think it’s a promising technology in an exciting field that could see strong growth in the coming years.

But now it is difficult to know how the business will perform in the future. I think a market capitalization of over a billion pounds is expensive. Even after Ceres Power shares halved last year, I don’t plan to buy them for my portfolio. But I’ll be watching how the business performs over the next several years.

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