Rising Financing And Geopolitical Risks Will Hamper Hydrogen Infrastructure

Key Takeaways

• Elevated financing barriers, policy uncertainty, and rising competition threaten ITM Power's project pipeline, future demand, and contract profitability.
  
• Ongoing cost control challenges and margin pressures from supply chains and under-absorbed costs may delay sustained profitability despite revenue growth.
  
• Shifting toward higher-margin contracts, improved manufacturing efficiency, and innovative new platforms position ITM Power for profitability and stronger recurring revenue despite near-term losses.

Catalysts

Designs and manufactures proton exchange membrane (PEM) electrolysers in the United Kingdom, Germany, Australia, rest of Europe, and the United States.

• Despite robust revenue growth and a rising contract backlog, ITM Power faces the risk that elevated global interest rates and structurally tighter capital markets will limit the availability of affordable financing for large-scale hydrogen infrastructure, which could suppress future project final investment decisions and thereby materially slow revenue growth and order intake long term.
  
• The company's operating margins remain at risk due to supply chain and geopolitical exposures: any escalation in trade barriers or raw material restrictions would amplify input costs and delay delivery schedules, leading to sustained gross losses and undermining efforts to reach and sustain profitability.
  
• There is a significant risk of policy reversals or subsidy reallocations as governments reconsider the cost-effectiveness of green hydrogen versus more mature decarbonization technologies; if regulatory momentum fades, future demand for ITM's core products could structurally contract, putting future sales and earnings at risk.
  
• Despite advancements in operational performance and new product launches, ITM Power continues to struggle with consistent cost control and profitability; persistent under-absorption of factory costs, legacy loss-making contracts, and execution risks could further erode net margins and prolong the path to positive EBITDA even as revenues rise.
  
• Increasing commoditization of PEM electrolyzer technology and intensifying competition from larger, better-capitalized rivals threaten to drive sustained price erosion and margin compression: if demand growth unexpectedly slows or a supply glut materializes in Europe or China, ITM Power could struggle to scale profitably and may face long-term pressure on both revenue and earnings.

ITM Power Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on ITM Power compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming ITM Power's revenue will grow by 53.6% annually over the next 3 years.
• The bearish analysts are not forecasting that ITM Power will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate ITM Power's profit margin will increase from -174.8% to the average GB Electrical industry of 5.8% in 3 years.
• If ITM Power's profit margin were to converge on the industry average, you could expect earnings to reach £5.5 million (and earnings per share of £0.01) by about August 2028, up from £-45.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 51.9x on those 2028 earnings, up from -9.3x today. This future PE is greater than the current PE for the GB Electrical industry at 14.6x.
• Analysts expect the number of shares outstanding to decline by 0.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.9%, as per the Simply Wall St company report.

ITM Power Future Earnings Per Share Growth

Risks

• The company's growing order backlog, which now stands at £145 million and is nearly double that of the previous year, is a strong leading indicator of sustainably increasing future revenue, suggesting that top-line growth may continue despite near-term losses.
  
• ITM Power's strategic move towards higher-margin contracts and away from legacy loss-making deals is expected to drive gross margin expansion, supporting a potential turnaround in profitability in the coming years.
  
• Advancements in manufacturing processes, notably the rise in Factory Acceptance Test pass rates from under 50 percent to 99 percent and the move to batch testing, are set to lower production costs and improve operating margins, contributing to better earnings performance.
  
• Ongoing technological innovation, especially the upcoming CHRONOS platform, promises significantly higher efficiency and lower costs versus competing technologies, which could give ITM Power a durable competitive advantage, boosting both revenue and long-term net income.
  
• The introduction of the Hydropulse build-own-operate model for decentralized hydrogen plants enables ITM Power to capture predictable, high-quality recurring revenue streams with contracted offtake, enhancing revenue visibility and supporting faster progression to positive EBITDA and stable cash flows.

Valuation

• The assumed bearish price target for ITM Power is £0.36, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of ITM Power's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £3.1, and the most bearish reporting a price target of just £0.36.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £94.3 million, earnings will come to £5.5 million, and it would be trading on a PE ratio of 51.9x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of £0.68, the bearish analyst price target of £0.36 is 87.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.