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It’s been a tough few months Ceres Power (LSE: CWR). I FTSE 250 the company with the leading green energy technology saw its price drop 44% during that short period.
Over five years again, the share has declined. That half-decade drop was 32% — but there were big ups and downs along the way. Indeed, the share has fallen to no less than 89% as of February 2021.
So is it now a bargain at its current price?
The answer, in my opinion, is yes… and no. It he can it has been cheap but it can also turn out to be a price trap even now.
Possible negotiation
Let’s start by looking at why Ceres shares could be money. Demand for energy storage will grow, with applications ranging from electric vehicles to portable power stations. Ceres has extensive experience in this field and has proprietary technology.
After a slow build-up, the company’s commercial results now seem to meet the demand for its technology. This year’s order intake was the best ever, with more than £100m of deals signed between the start of 2024 and the end of August.
Sales growth but no profit
The concern I have though, is that although ordering has been strong, FTSE 250 companies continue to lose heavily.
In the first half of the year, the gross profit margin was 80%. That sounds very impressive. But there is a difference between a gross margin and the net the remaining margin after deducting the company’s expenses. In the case of Ceres, that’s a big difference. While the first half produced a net profit of £23m, the loss for the period was £12.6m.
Now, here again we see a possible reason to be bullish. Yes, £12.6m is a huge loss. However, it was less than half of the same loss at the same time last year. That’s good progress even though the company continues to spill red ink.
If revenue can increase (and the order book looks strong), that can help the company’s economics as fixed costs can be spread over more sales. If that happens at the right rate, then the current share price may be a bargain.
It looks promising, but still dangerous
Ceres has the wind in its sails when it comes to potential sales growth. It entered the Indian market, with a customer The Doosan we expect mass production using the company’s FSTE 250 technology to begin next year. And a key partnership with a Taiwanese electronics firm appears to be going well. That could produce royalties in the future.
However, Ceres has a long history of promising prospects, but continues to burn money. It still is, even though the economy is starting to look better than ever.
I can see the promise here – but I feel like the commercial model remains unproven. So despite the recent price drop, I wouldn’t buy this stock just yet.
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