Arcadium Lithium is undervalued due to temporary oversupply issues in the lithium market and slow EV demand growth.
Despite being overshadowed by negative market factors, Arcadium has significant potential for growth and profitability in the future.
With a potential rebound in lithium prices and increasing demand, Arcadium's stock could appreciate significantly in the next few years.
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Arcadium Lithium (NYSE:ALTM) is a fascinating story, at the bottom of which may be one of the most underrated and undervalued companies in the lithium industry. First, it's important to point out that the broader lithium sector has been in a "slowdown phase" due to temporary oversupply issues, demand concerns in the EV space, and other transitory factors. Due to the uncertainty dynamic, lithium stocks have been declining for years.
Also, Arcadium Lithium is a newly formed company, the product of a recent "$10.6B merger of equals" between American chemical specialist Livent and Australian lithium miner Allkem. The resulting company, Arcadium Lithium, which is who we are focusing on today, is now one of the most significant lithium miners and specialized chemical producers globally.
Despite numerous synergies and constructive factors due to the merger, Arcadium has been overshadowed by the transitory negative factors in the lithium market, and its market cap has melted to just about $2.85B. Therefore, Arcadium's stock is down by about 75% since the merger and down by roughly 83% from Livent's pre-merger high.
The lithium market won't stay down forever, and the lackluster EV demand should improve. The EV market has expanded so rapidly recently that it's normal for the growth to slow down for several years.
The temporary oversupply issues should be resolved, and the market will likely balance out, leading to higher lithium prices. This should translate to much higher revenues and substantially more profitability for the top lithium companies.
Arcadium is in a prime position to capitalize, and its stock could appreciate by several-fold over the next 2-3 years, making it an excellent risk/reward opportunity and a solid investment long term.
Arcadium and other lithium stocks have been in a bear market for years, but every ride comes to an end, eventually. We found Arcadium's stock price around $2.50, an ultra-low level, which may be a low point or close to a long-term bottom for Arcadium. There is likely a limit to how low Arcadium can go, and as the company could have around $2-3B in sales in future years (2026/2027), it trades at around one-time forward sales, which is cheap considering the growth we can see when the market stabilizes. The Lithium Demand Likely To Return
There was a bit of an oversupply issue in the lithium market, which has been exacerbated by the relatively slow growth environment and high interest rates. However, despite the temporary imbalances in the market, demand should return, which should balance out the market. After all, there is no getting away from it. Lithium is in products all around us, and we will likely continue using more lithium as we advance.
Lithium Projected Demand
Lithium demand (statista.com )
Lithium demand should continue increasing steadily in the future, and the primary catalyst will likely be increased EVs. There could be about a 10x increase in demand from around 2020-2021 to 2035. Therefore, the market-leading companies that control the lithium space could evolve into
dominant industry leaders, and it's possible that Arcadium's $2.85B valuation will expand to $10-20B in the next 5-10 years as Arcadium becomes one of the best lithium companies globally in future years. Lithium Prices Should Rebound
Lithium prices (tradingeconomics.com )
Due to the temporary lithium oversupply and lackluster EV demand, the
price of lithium has crashed to levels not seen since the lows of 2020. Just as lithium prices became hugely overbought during the highs in 2021 and 2022, they have become highly oversold recently.
This dynamic implies that there will likely be a reset where the price of lithium finds a "fair price" in the market. 50,000-60,000 may be too high, but 5,000-10,000 may be too low. Therefore, a fair price may be around 15,000-30,000, suggesting there is substantial room for lithium to appreciate in future years.
The higher the lithium price, the better it is for Arcadium's profits, as it is one of the most significant lithium miners and a leading lithium compound manufacturer globally. Arcadium can take the raw material lithium and make various products, bringing them to market with increased efficiency and decreased cost. Massive Earnings Potential Ahead
One reason Arcadium has been down so much since its merger is the uncertainty surrounding earnings. Since it is a newly merged company, there is uncertainty regarding earnings, which short sellers have taken advantage of in this situation.
However, despite the uncertainty, Arcadium reported earnings recently, and the results were fine. Arcadium reported in-line EPS of $0.05, and in-line sales of $254.5M, an 8% YoY gain. Despite such a challenging atmosphere, Arcadium is performing well. Also, if the company is performing well in hard times, how well is it going to do in a lithium bull market?
We see that Arcadium is experiencing a transitory earnings decline due to the challenging market conditions in the lithium space. However, earnings should remain relatively robust despite the slowdown phase, and Arcadium's earnings could expand much more than the current estimates suggest.
Still, even if we focus on the current figures, there is a high probability that Arcadium will earn around $0.50-0.70 in the next few years (2025/2026). This dynamic places Arcadium's forward P/E ratio at only about 5.4-3.8. Does anyone else see a problem with this?
Yes, a price-to-earnings valuation of 4-5 is unsustainable, especially given Arcadium's sales and earnings growth rate. In other words, Arcadium is dirt cheap here and will likely be worth much more when the market stabilizes. Where Arcadium's Stock May Be Heading
Column 1
Column 2
Column 3
Column 4
Column 5
Column 6
Column 7
1
Year
2025
2026
2027
2028
2029
2030
2
Revenue Bs[/B]
$1.09
$1.42
$2.25
$3.5
$4.7
$5.7
3
Revenue growth
24%
30%
58%
55%
35%
20%
4
EPS
$0.33
$0.68
$1.00
$1.20
$1.43
$1.70
5
EPS growth
50%
105%
47%
20%
19%
18%
6
Forward P/E ratio
9
12
13
15
14
13
7
Stock price
$6
$12
$19
$22
$25
$28
Source: The Financial Prophet
Due to its market-leading position in mining and lithium chemical/compound manufacturing, Arcadium could increase its sales rapidly as growth returns to the global economy and interest rates decline in the future. Moreover, Arcadium should benefit from the synergies the new company has because of the merger. As sales and EPS improve, Arcadium's multiple could expand substantially, leading to a much higher stock price in the coming years.
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