There's a lot of positive momentum for this commodity producer -- but also major risks.
We are in the midst of a major energy upheaval. After a century-plus of fossil-fuel domination, the world is moving more and more toward solar power, wind generation, and battery storage.
For transportation, there's a major transition to battery electric vehicles (EVs) over internal combustion engine (ICE) vehicles. The demand for EVs is soaring, with analysts projecting they'll be the majority of vehicle sales by 2030.
But what do companies like Tesla and Rivian need to build EVs? One commodity reigns supreme above all else: lithium.
The largest supplier of lithium from the United States -- and second largest in the world -- is Albemarle (ALB -3.03%), which has its stock listed on the New York Stock Exchange. Shares are in a major drawdown after the price of lithium collapsed, providing a potential buying opportunity for the commodity producer that's vital for the green energy transition.
Should you buy this backbone of the EV revolution?
If you want a battery-powered future, you need lithium
The batteries in an EV are lithium-ion, which unsurprisingly use a lot of lithium to function. Even the next-generation companies, such as QuantumScape, looking to innovate on current battery technology are going with a lithium-based solution. Long story short, if the world is going to produce more EVs, it needs more lithium.
Some estimate that we'll need to more than triple annual production from 1 million tons to over 3 million tons by 2030. A lot of metal needs to be dug out of the ground to make this happen.
That is where Albemarle steps in. The company is the second-largest lithium producer worldwide, with facilities in Chile and the United States. It's one of the main suppliers of lithium to the companies making EV batteries (along with other battery solutions), with an estimated 16% global market share.
Through many years of acquisitions, the 100-year-old-plus company has maneuvered its way to become one of the backbones of the EV revolution. And yet, very few investors have ever heard of it.
The stock is cheap, despite lithium price declines
In recent years, lithium pricing has been extremely volatile. During the commodity pricing boom in 2021 and 2022, it rose to over $50,000 per ton, compared to under $10,000 before the pandemic. This helped Albemarle's profit generation, posting over $3 billion in net income over a trailing-12-month period at one point in early 2023.
However, lithium prices have come back down to earth and are currently at just over $11,000 per ton. Lower prices on the same fixed-cost basis mean lower profits, which Albemarle was not immune from.
However, despite this huge price drop, the company is still profitable, generating $1.57 billion in net income over the past 12 months. In 2024, it expects to generate a profit again unless prices fall off a cliff.
As one of the largest Lithium producers, Albemarle is in a much better position to weather any volatility in lithium prices, compared to smaller miners. Even with profits moving in the wrong direction, the stock looks cheap, trading at a price-to-earnings ratio (P/E) of just 8.6. This could look much cheaper, as well, if lithium prices start rising again due to the global demand for EVs and lithium-ion batteries.
ALB Net Income (TTM) data by YCharts.
One looming risk: An oversupplied market
Albemarle has a cheap earnings multiple and is one of the leading producers worldwide. Additionally, there's a huge and growing demand for lithium. You might be thinking, then, that Albemarle is a can't-miss investment.
The problem is, Albemarle is still a producer of commodities.
Lithium is an abundant resource around the world, and we just need companies (or government entities) to dig it up. This brings me to my biggest concern: China. China is prioritizing success in the EV supply chain and has a much larger pocketbook than Albemarle.
Like steel producers decades ago, it's possible that China could overwhelm the market with supply by subsidizing its domestic producers, driving prices down, and pushing competitors such as Albemarle out of the market. I don't think this is likely, but it's a possibility that governments without profit priorities may start competing with Albemarle -- which would be a problem.
Albemarle can perform well for investors over the long term, but it comes with risk. Invest with a watchful eye on this stock.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
