ITM Power (LON: ITM) shares are the most shorted stock in London at present. Given the 75% fall in price over the past 12 months already that is showing a certain optimism in the short case for ITM. But then that's what the market is calling and that's therefore the consensus view. As investors or traders our duty is to try and work out what we want to do about this. Do we agree with the standard view or differ?
The base business case for the ITM Power stock is that the global economy is about to go through a wrenching change. We're all supposed to be using very much less oil and gas in the immediate future in order to salve Gaia. So, being at the forefront of the alternative fuels business could be a good idea. Proton membrane technology for hydrogen production could be that pioneering business area. The base business case against is twofold. Firstly, it's always the pioneers who end up with the arrows in their back and ITM doesn't seem to be notably good at this new business line either.
ITM Power share price from London Stock Exchange Another way to look at this is that green hydrogen (electrolysing water using renewably generated electricity) is indeed likely to be one of the solutions to climate change. But that doesn't mean that the people doing it are going to make money doing so. That's not how capitalism and markets work. There needs to be some barrier to others doing the same thing - Warren Buffett's moat around a business and its profits.
Yes, OK, ITM Power is building bigger machines than anyone else. But there is no obvious moat here. As soon as it is obvious that electrolysis to hydrogen works then what is there to stop others doing the same? That means that the capital sunk into exploring whether it works is unlikely to be recovered.
On the other hand perhaps being that step or two ahead of everyone else is a valuable advantage. As ever things are rather balanced here. The 75% decline over the past 12 months does tell us what the market more broadly thinks - that there is no such moat, even if management is able to develop the technology properly. Betting against that consensus view, well, we need to know that the consensus isn't right in order to do that. Contrarianism for its own sake is not a known manner of making a profit.
