ITM Power: Growing Revenues Don’t Justify Share Price (OTCMKTS:ITMPF)

U.K. alternative energy company ITM Power (OTCPK:ITMPF) has seen revenues improve and is scaling up manufacturing capacity. But it remains lossmaking and I believe the investment case is still weak. I maintain my “sell” rating.

Revenues are Growing Substantially and Set to Continue Doing So

The company released its interim results in January. Revenue increased to £4.2m from just £0.2m the prior year, although that had reflected the pandemic impact. At the equivalent stage in 2020, revenue and grant income had come in at £4.4m, so the headline number actually fell compared to pre-pandemic levels, although on that occasion the revenue component had been just £0.2m whereas this time it was £4.2m, so commercial revenue has increased notably. Then again, as I outlined in ITM Power: Price Is Ahead Of Fundamentals By Far, that is still smaller than sales revenue in 2019 and less than a quarter of total revenue and grant funding that year, so arguably things have been going backwards.

As the increased revenue suggests, the company has started to gain more commercial traction. The company reported an 86MW backlog of signed contracts, up over 300% from the same stage the prior year. With the factory now operational, I would expect that ramped up production could match revenue more closely to contracted sales, suggesting that in the next year or so revenues could jump sharply.

Profitability Remains a Challenge

However, in my view unsurprisingly given the company’s history to date, those revenues have not yet translated into profits. In the first half, the company’s loss increased 28% to £15.4m. Cash burn fell but still came in at £11.8m.

From ITM’s perspective, that is not a problem. They raised another £242m in funds in November (on top of the “transformative” £172m raise the prior November which itself followed hot on the heels of a £325m fundraise the month before), meaning that the company had a cash balance of c. £390m at the time of the interim results in January. From an investor’s perspective, however, I see the ongoing losses and cash burn as a problem. At this point, ITM seems to be great at raising money, good at spending it but no good at making it. Those are hardly the characteristics I look for in an investment case.

An alternative viewpoint might point out that this is part of the nature of being a startup. The company spending money could result in higher revenue and profit potential down the line. But I question whether ITM’s strategy in this regard is the right one. Having built a large factory, why is it already spending money on planning a second one (it expects spades in the ground on that project in the second half of this year) rather than operating more leanly and focusing 100% on making the most of the first one? After all, as an update on a delay to a contract delivery last month flagged, supply chain kinks remain to be worked out. After closing in on two decades as a listed company, a “spend now, earn later” model at ITM seems increasingly tough to justify in terms of the investment case in my view (although clearly not all investors, given those successful fundraises). Share count has ballooned from 70m in 2003 to 613m today.

Valuation Continues to Look High

My last note on the company, ITM Power: Some Business Progress, But Still Overvalued, was in December and carried a “sell” rating. Since then, the London-listed shares are down 7% while the US-listed ticker to which this article pertains has seen a steeper fall of 13%.

My valuation concerns remain similar even after the price fall: ITM as a business simply has not proven the commercial potential to justify its current price. The current market capitalization of £2.2bn looks far overdone to me for the company’s commercial performance and long history of shareholder dilution. I remain bearish on the shares at their current price.