Bet on the Long-Term Bull Case With LTHM Stock

After a more than three-fold run higher between late 2020 and mid-2022, the market has cooled on Livent (NYSE:LTHM) stock.

Shares in this leading provider of lithium compounds has traded sideways lately. Both analysts and investors hold a lukewarm view of LTHM stock at present as a result of uncertainties over the future direction of lithium prices.

After a tremendous run-up, due to burgeoning demand and tight supplies, there’s increasing concern that there will be a correction, which will send lithium prices, and Livent’s profitability, down the tubes.

However, concerns about a severe near-term correction in lithium prices may be overblown. Furthermore, long-term trends remain highly favorable for lithium producers, this company included.

With high growth likely to stay on the menu throughout this decade, LTHM continues to have substantial upside potential, which perhaps may make it a great opportunity, as the stock bounces around $30 per share.

On the Fence About LTHM Stock

Lithium is an essential component in the production of electric vehicle (or EV) batteries. With automakers making a big pivot into EV production this year, demand has outstripped supply, driving a big jump in spot lithium prices.

But many analysts are starting to argue that after this lithium boom, a reversal is just around the corner. Analysts at Morgan Stanley believe spot prices could fall 75% between now and 2024, due to supplies once again outpacing demand.

Even if there’s a less severe lithium price plunge, some analysts, like JP Morgan’s Jeffery Zekauskas, are concerned it could have a severe impact on LTHM stock.

Zekauskas, who currently gives the stock a “hold” rating, and a $28 per share price target, argues that the company’s lithium breakeven point is at $40,000 per ton. This analyst also believes that lithium prices will fall, more due to dropping demand, rather than on increased supplies.

With this, it makes sense why the market is currently taking such an on the fence view on Livent stock. That said, it’s hardly a slam dunk that this bearish thesis will play out. A lot still suggests supplies will remain tight, and demand will stay high.

Long-Term Bull Case Remains for Livent

On the surface, it may seem as if now’s not the time to buy LTHM stock, yet while it’s possible the aforementioned bearish scenarios play out, it’s hardly a lock that they will. On the supply side, as an Investors Business Daily commentator discussed on Oct. 27, optimistic lithium supply projections often come up short.

A big increase in mining projections does not always lead to a big increase in usable supply. That’s not all. Bearish analysts may be overestimating the impact of a global recession on demand.

The U.S. Federal Government, through both grants and tax incentives, is also helping to accelerate the mass adoption of EVs. In turn, incumbent automakers continue to move full steam ahead, transitioning from making mostly gas-powered vehicles to making mostly electric-powered vehicles.

As I discussed earlier this month, in order to secure supply for this transition, major automakers like General Motors (NYSE:GM) are inking deals with Livent to provide them with steady supply of this vital EV metal. GM’s peers could follow suit.

With all of this in mind, the long-term bull case remains intact. These factors stand to not only sustain, but grow, the company’s earnings in the coming years.

The Verdict

EV-driven demand for lithium has a strong chance of keeping lithium prices above Livent’s breakeven point. Meanwhile, with the company expanding its battery-grade lithium capacity, organic growth, not just higher prices, will help to further increase earnings.

This points to higher prices ahead for shares in the coming years, in line with increased earnings. In addition, with an elevated level of growth likely to carry on for many years, Livent (which trades for 17.4 times next year’s estimated earnings) could experience some expansion of its forward earnings multiple.

Nevertheless, it could take Wall Street some time to really catch on. Even if Livent’s earnings release tomorrow beats expectations, the current narrative on lithium could limit the extent of a post-earnings rally.

Again, this works to your advantage. The market’s current doubtfulness has possibly created an ideal long-term entry point for LTHM stock.

On the date of publication, Louis Navellier had a long position in LTHM. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.

The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.

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