Is now the time to be buying lithium stocks?

Lithium stocks have been identified as a sector with enormous potential as EVs grow in use. But is now the time to buy? Gordon Best takes a look.

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Lithium is a hot commodity these days. The demand for lithium is soaring, thanks to the increasing popularity of electric vehicles (EVs). As a result, lithium stocks such as Albemarle (NYSE:ALB) and Sociedad Química y Minera de Chile S.A. (NYSE:SQM) have been identified as key beneficiaries.

But are lithium stocks at a potential buying level, or is it too soon?

Why would I invest?

The International Energy Agency (IEA) predicts that the demand for lithium will increase by 400% by 2030, as more and more people switch to EVs. This is a huge growth opportunity for lithium companies, but it also means that there will be a lot of competition.

Investors also need to consider the supply of lithium. The world’s largest lithium reserves are located in Australia, Chile, and Argentina. However, these reserves are not evenly distributed. For example, Australia has a lot of lithium reserves, but it doesn’t have a lot of lithium production capacity. This means that Australian lithium companies may export their lithium to other countries, driving up the cost.

Most importantly, investors in lithium stocks need to understand that the market is still relatively new, bringing a lot of uncertainty. For example, it’s possible that demand for lithium could slow down if there is a breakthrough in battery technology that negates the need for large amounts of lithium.

Which companies are well positioned?

With all of that said, there are a few lithium stocks that I think are worth considering. Two of my favourites are Albemarle and SQM.

Albemarle is the world’s largest lithium producer. The company has a strong track record of growth and a diversified portfolio of lithium assets. Albemarle is also well-positioned to benefit from the growth of the EV market. The company has a joint venture with Tesla, and it is also supplying lithium to other major automakers, such as BMW and Ford.

SQM is another leading lithium producer. The company has a strong presence in Chile, which is home to some of the world’s largest lithium reserves. SQM is also a major producer of iodine, which is used in a variety of industries, including electronics and pharmaceuticals.

Both Albemarle and SQM are interesting for those who are looking to get exposure to the potential growth of lithium stocks. However, there are some key differences between the two companies. Albemarle is a more established company with a larger market capitalisation. SQM is a smaller company with a higher growth potential.

Discounted cash flow calculations suggest the shares in both companies may be as much as 75% undervalued. The price-to-earnings (P/E) ratio of 6.6 times for Albemarle, and 5.5 times for SQM, is significantly below the average of the sector at 14.2 times.

Profit margins for both are also growing, with Albemarle at 41%, and SQM at 35%. Despite the next few years showing low or declining growth in revenue for both, this growth in margin suggests that the sector is moving in the right direction.

Am I buying lithium stocks?

Lithium stocks are clearly going to play a significant role in the growth of the EV sector. However, there are some risks associated with investing in lithium stocks at this stage, and the coming years look uncertain.

For my portfolio, I believe that resilient companies able to grow steadily in the sector will be well positioned, and intend to invest in both companies in the coming months.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Gordon Best has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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