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Since the first week of February, the shares of power of ceres (LSE: CWR) have lost more than a quarter of their value. In the last year, they have been reduced by almost half.
But from a long-term perspective, they’ve done well. If I had invested £300 in Ceres five years ago, my share would now be worth over £1000, even after the recent drop in share price.
So should I add the stocks to my portfolio in the hope of a future recovery?
Up and down
I think it’s helpful to understand what drove Ceres Power’s stock price up and what caused it to fall.
In a period when renewable energy stocks have drawn investor attention, interest in Ceres’ hydrogen technology has helped drive shares higher. While some rivals are closer to an idea on the drawing board than a revenue-generating business, Ceres has an established customer base and sizable revenue.
But business development has been uneven. Revenue last year is expected to hit £21m, which is a sharp drop from the previous year. A delay in signing a big deal to deploy Ceres technology in China appears to have contributed to investor dissatisfaction with the speed of Ceres’ progress.
The company remains heavily dependent on a few major customers. It is also still in deficit. Ceres’ most recent annual results showed an after-tax loss of £21m. I expect that when the 2022 results are released, they will also show considerable losses.
promising technology
Given that constant negativity, why has Ceres Power continued to excite some investors? After all, while Ceres Power’s share price has fallen a lot, the company’s market capitalization of £711m is still substantial.
I think the valuation reflects three key questions, to which different investors have their own answers.
Will the future market for hydrogen energy be substantial? I think it will, as global energy use remains high and users look to increase the role of renewable forms.
Second, does Ceres Power have what it takes to perform well in this market? Here, I view the answer as a qualified ‘yes’. The firm has promising technology. An impressive list of clients like the forest suggests that Ceres may well compete at scale on the global stage.
However, the market for hydrogen energy is still developing. Ceres’ technology has put it in a promising position for now, but the road is long. It’s unclear how well the company will be able to adapt and grow as the market matures and competition is likely to intensify.
Earn money
The third question is one that I think currently lacks a clear answer. Can Ceres make a sizable profit on a consistent basis?
So far, it has made losses year after year. That’s not unusual for a young company looking to build a market for its products.
But I’m still not convinced that the company has a clear path to continued profitability at a level that justifies Ceres Power’s current share price. For that reason, I don’t clearly see the stock as a bargain and have no plans to add any to my portfolio.
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