The ITM Power (LSE:ITM) share price has been on quite a rollercoaster ride these past few years. After exploding to as high as 717p in early 2021, the green hydrogen stock has since collapsed to around 248p today. That’s a 65% decline in about a year.
Yet despite this downward trajectory, analysts at investment bank Jefferies have reiterated their price target of 800p. If they’re right, I could potentially triple my money through buying shares today. So, should I be adding this stock to my portfolio? Let’s explore.
Eruptive growth on the horizon?
As a reminder, ITM Power developed a proprietary electrolyser technology that can extract hydrogen from water without producing any harmful emissions in the process. It’s a significantly cleaner approach than the traditional methods relying on fossil fuels. And with demand for the element on the rise, forecasts for the hydrogen market are pretty bullish.
In fact, The Business Research Company released a report in November that predicted the global green hydrogen market will grow at an average rate of 39.4% annually until 2025! That’s a pretty massive tailwind for this business, especially since it’s ramping up its manufacturing facilities.
As the company has a considerable backlog of orders and contracts being negotiated growing by triple-digit rates, reaching these analyst price forecasts may not be as unrealistic as it seems. Even more so when the revenue stream is predicted to reach as high as £64m in 2023. By comparison, its revenue in 2021 came in at £4.3m. That’s a 1,520% predicted jump in two years.
Assuming it hits this revenue target, I wouldn’t be totally shocked to see the ITM Power share price triple as a consequence. But in my opinion, I think this is pretty unlikely.
The risks
Despite losing more than half its market capitalisation, the company still has a price tag of £1.6bn. Considering I just mentioned the current revenue stream sits at a measly £4.3m, the valuation is by no means cheap. And when I top this off with the fact that the group lacks any form of profitability, the risks of volatility in the ITM Power share price go through the roof.
To meet investor expectations, the company must somehow deliver £21.6m of revenue by the end of April this year. Looking at the latest interim results from October 2021, it took six months to generate only £4.2m. That’s why I don’t think the company will hit this target. And as with any stock whose valuation is driven by expectations rather than fundamentals, the ITM Power share price will likely continue its downward trajectory if I’m right.
The bottom line
The group’s technology seems to be a viable solution to a significant problem. And it could deliver explosive returns over the long term. But at today’s share price, investors in ITM Power are being too optimistic about the timeline needed for this growth. At least, that’s what I think.
With that in mind, I’m not tempted to add this business to my portfolio today, even with the staggering price forecasts from analysts.
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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