What happened
Easy come, easy go.
Shares of start-up lithium mining company Lithium Americas (LAC) popped earlier this week on news that money is starting to roll out to support the U.S. government's program to boost adoption of electric cars in America. But these same shares are tumbling today -- down 4.2% through 10:20 a.m. ET -- on news that investment bank Piper Sandler has just cut its price target on the stock.
So what
It wasn't a huge cut. Piper Sandler's reduction in price target from $38 a share to $36 a share just shaved 5% off the analyst's estimation of Lithium Americas' profit potential. What's more, Piper continues to believe that Lithium Americas is a stock worth buying, maintaining an overweight rating on the stock.
But Piper does warn that it sees a "slight easing" in lithium demand in the near term, as ratings watcher The Fly reports today. And factoring this easing into its model, the analyst is reducing its earnings forecast for Lithium Americas "modestly."
Now what
And that could be a problem.
Lithium Americans is currently unprofitable, and indeed, producing no revenue at all, according to data from S&P Global Market Intelligence, and analysts expect Lithium Americas to explode into profitability as production begins in 2023. On average, analysts see revenue topping $260 million next year, and growing to more than $1 billion over the next five years. Earnings under generally accepted accounting principles (GAAP) could be as much as $0.95 per share next year, rising to $3.52 per share by 2026.
Past that, no one seems to be making any earnings estimates. But even just working with what's known, it looks like Piper Sandler must be positing a valuation well in excess of 37 times 2023 earnings for Lithium Americas stock. True, if earnings grow as expected, the analyst's $36 price target would imply only a bit more than a 10x valuation based on 2026 earnings. But given that Lithium Americas hasn't started producing lithium at scale yet, I'd take those 2026 numbers with more than a few grains of lithium salt.
While I admit Lithium Americas stock has potential, I'll be a whole lot more comfortable investing in it after the company has succeeded in producing some actual profit -- not just promising to be profitable in the future.
