When it comes to the outlook for FTSE shares, the divergence can be stark. Some businesses are killing it, with the share price rocketing higher. For other companies in shrinking sectors, it could be a tough period ahead. So when I spotted a stock that has already been rallying and yet has forecasts indicating it could continue, I thought it best to look deeper!
Fuelling growth
I’m talking about Ceres Power Holdings (LSE:CWR). Up 321% in the past year, the market cap is now close to £1bn. Before we get onto the analyst forecasts, it’s important to understand what’s happened over the past year. In short, the clean-energy technology company has moved from being largely an R&D story towards proving that its technology can actually generate meaningful revenue.
Ceres develops technology used in products like fuel cells. The benefits to end users include highly efficient electricity, right through to producing hydrogen. Crucially, Ceres doesn’t plan to spend billions building factories itself. Instead, it licenses its intellectual property to industrial giants that manufacture the technology, allowing it to collect licence fees and royalties.
I think this explains much of the spectacular share-price rally. One partner, Doosan, began mass production using Ceres technology last year, resulting in Ceres receiving its first royalty revenues.
Meanwhile, China’s Weichai signed a manufacturing licence targeting power applications including AI data centres, which has huge potential. In other words, the market is increasingly valuing the company as a commercial licensing business rather than an expensive science project.
Forecasts for the year ahead
The stock is currently trading at 431p. Based on the average forecasts from banks and brokers, the target price for the coming year is 857p. This represents a 98.8% gain. Of course, this is just the average. The team at UBS is even more ambitious, with a 970p target. On the other hand, Investec‘s research team projects 410p.
So there’s a wide range in the forecasts, but the average is clearly much higher than the current stock price.
Could the shares double again? It’s certainly possible, although I’d consider that an optimistic scenario rather than my base case.
Don’t get me wrong, I think the share price is heading higher. Full-year results showed Ceres generated a 70% gross margin despite revenue falling to £32.6m. Analyst consensus sees revenue rebounding to around £60m this year, with adjusted EBITDA moving from a £32.5m loss to approximately £1m positive. If royalties accelerate as partner factories ramp production, economies of scale are going to ramp up profits fast.
Then there’s AI. Data centres need enormous quantities of reliable electricity, while grid connections are increasingly becoming a bottleneck. Ceres is only just starting to tap into this market, which could be very lucrative.
Yet after the 321% run in the past year, I think the pace of growth for the stock could slow somewhat. After all, Ceres remains loss-making and might not deliver on profit aims. Proper sustainability depends heavily on partners successfully scaling production, which is out of its hands.
So when I put it all together, I still like the stock and am considering buying it, but I’d be surprised if it doubles in value in the next year.
Should you invest £5,000 in Ceres Power Plc right now?
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Jon Smith does not hold any positions in the companies mentioned.
