Extract from fool:
Is the bubble bursting?
Looking at the industry on a macro-thematic level – absolutely not, according to the bulk of analysis on the EV, lithium-ion battery, and lithium mining sectors.
Demand for batteries looks set to continue rising into the coming periods. This, combined with the push away from fossil fuels in energy and fuel production, could see widespread adoption in the global economy.
However, former Bank of America asset manager Tom Richardson, referencing Novonix in yesterday’s Australian Financial Review, said there are “dozens, or perhaps hundreds, of other lithium or green-focused businesses that will rely on positive sentiment and announcements (rather than cashflows) to justify staggering valuations over the next 12 months”.
Richardson submits there is a disconnect between share prices and underlying fundamentals in the industry. For instance, he states Novonix recently reached a market capitalisation of $6 billion on revenue of just $1.6 million for the previous quarter.
The report also notes that during the quarter, Novonix spent just $906,000 on research and development, but spent $1.5 million on product and operating costs.
Not only that, the company has issued equity to secure almost $249 million in cash on the balance sheet. US company Philips 66 also took a 16% stake in the company in August via a US$150 million equity investment for almost 78 million shares.
Further analysis
Analysts at Morgans Financial also rate Novonix as a ‘hold’ and value the company at just $7.50 per share. Further analysis obtained from Bloomberg Intelligence shows the company’s return on invested capital (ROIC) of -9.12% is lower than its cost of capital at 9.4%. It therefore misses this hurdle with an 18% spread.
Moreover, Bloomberg also shows the company is trading at 678x sales, and that investors are paying more than 21x its book value of equity to invest right now. That’s a substantial premium to the median values of its peer group.
What impact this will have on the Novonix share price is yet to be seen.
What’s next for the Novonix share price?
In reality, it is unwise to try and accurately predict the rise and fall of market/company bubbles, or even extended market movements either way.
The fact is Novonix is centred in a high-growth industry that is currently at scale and has a unique product that aims to improve the battery technology sector.
However, listed companies in the industry are trading at lofty valuations, and some experts are questioning whether these valuations are justified on the basis of company-specific fundamentals – not so much the lithium industry itself.
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