Shares in UK clean energy company Ceres Power (LSE: CWR) have experienced an almighty crash in recent weeks. After hitting 873p on 29 May, they’ve fallen to 570p – a drop of about 35%.
So, what’s going on here? And are the shares worth a look after this huge decline?
A shift in the markets
In my view, there are several factors that have contributed to the drop here. The first is a general shift by investors out of speculative stocks.
This has been happening for most of June. In terms of what’s driving this, I think the SpaceX IPO is a major factor.
I believe that investors have been pulling money out of speculative holdings in order to raise capital for the IPO. This takes place tomorrow (12 June) by the way.
Concerns over valuations could also be a factor here, though – recently there’s been a little bit of a shift out of growth stocks and into value shares. I’ll point out that on 27 May, I noted that the valuation here was very high and said that a lot of growth was already priced in (I almost called the top to the day).
A capital raise
The second factor is a substantial capital raise. Earlier this week, the company proposed raising approximately £100m to strengthen its balance sheet in order to drive growth and enable investment to support partner scale-up.
Yesterday, this capital raise was completed. In the end, the company raised £103m at a price of 570p per share (a discount to the share price at the time).
A total of 18m new shares were issued, representing approximately 9.2% of the existing issued ordinary share capital of the company prior to the capital raise. So, there was a fair bit of ‘dilution’ here.
All of a sudden, existing investors own less of the company that they did previously. Their slice of the pie (revenues or earnings) has shrunk.
An investment opportunity?
Are the shares worth a look near 570p? Well, they could be if an investor is looking for exposure to the clean energy and/or AI power themes and comfortable with risk (the company isn’t yet profitable).
There’s no doubt that this company has some interesting technology. Recently, it has signed deals with the likes of Centrica and Weichai Power, which suggests that it’s doing something right.
That said, the valuation is still very high, even after the recent share price drop. Comparing forecast revenue this year (£59m) with the market cap £1.1bn, we get a price-to-sales ratio of around 19, which means that the stock isn’t cheap.
Note that there’s no guarantee that the company will actually generate revenue of £59m this year. In the past, sales have often come in well below analysts’ forecasts (this is a risk to consider here).
Personally, the shares are too risky for me. I am keen to get some power stocks into my portfolio at some stage. However, the lack of profitability and the high valuation here spook me.
Should you invest £5,000 in Ceres Power Plc right now?
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Edward Sheldon does not hold any positions in the companies mentioned.
