Why lithium stocks are selling off on Thursday

Lithium heavyweights Pilbara Minerals (ASX: PLS) and Allkem (ASX: AKE) opened 3-4% lower on Thursday, following a warning from Bank of America about further weakness in the lithium market and downgrade of US-listed peer Albemarle. 

Albemarle was the worst-performing stock on the S&P 500 overnight, down 9.8% to a two-and-a-half year low after BofA cut its rating to Underperform from Neutral and lowered its target price to $161 from $212. The target price implies 5.3% upside from current levels. 

Albemarle price chart (Source: TradingView)

BofA analyst Steve Byrne says a lithium market surplus will continue through to 2025, leading to a period of earnings and margin pressure throughout the value chain. He expects Albemarle to encounter significant cash burn amid its pursuit of both organic growth and potential acquisitions. 

“[Albemarle’s] growth plans likely require upwards of US$2 billion in debt financing over the next two years to bring into fruition,” said Byrne.

The need for more cash will drive “further downward revisions to the company’s valuation vs. a peer such as Livent Corp, who should be able to manage their growth plans with minimal external financing.”

“It is not that we see Albemarle shares as having material downside from here, but we see better opportunities in our companies where earnings have moved through troughs and are closer to an inflection,” he says.

The analysts forecast Albemarle to deliver FY24 earnings of US$1.82 billion, down from the previous estimate of US$3.6 billion. While the forecast for FY25 was cut from US$4.47 billion to US$2.87 billion.

Further insult to injury

Tesla released its Q3 earnings after market close on Wednesday and the company missed most consensus operating metrics. Here are the key takeaways:

• Q3 revenue rose 9% year-on-year to US$23.4bn vs. US$23.8bn consensus – This also marked the slowest growth rate since the second quarter of 2020

• Net income fell 44% to US$1.85bn

• Gross margins fell to 17.9% vs. 25.1% a year ago due to deep price cuts

• Non-GAAP EPS was $0.66 vs. $0.72 consensus

• Free cash flow of US$848m vs. US$1.98bn consensus

“Investor expectations for Tesla Q3 earnings were relatively low and Tesla’s actual results, in fact, came in below consensus expectations for the quarter … despite recognising nearly double the amount of zero emission vehicle (ZEV) credits during the quarter,” Morgan Stanley analysts said in a note on Thursday.

“Tesla adjusted operating margin (excluding ZEV) came in at 5.3% which compares with our 3Q23 adjusted EBIT margin estimate for GM and FOrd of 7.6% and 4.9% respectively.”

I guess Tesla was just a car company after all.

Short sellers win out

Short sellers have relentlessly targeted lithium stocks since March, with a focus on these key themes:

• Pilbara Minerals – The lithium bellwether

• Liontown Resources – Takeover risk (which fell through earlier this week)

• Core Lithium, Sayona Mining and more – Names that have operational challenges with current production and/or bringing projects online 

Here is the latest short data:

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Ironically, short sellers, who need to buy back the shares to realise gains, could be the ones currently propping up stock prices.