If you made an early bet on MP Materials (MP 8.69%), it has paid off handsomely over the past three months, a time period in which the stock rose a huge 130%. Most of that gain came following big funding news for the rare earth metals producer, which is still in the early stages of its development.
With such a quick and dramatic price advance, there's a good reason to consider locking in profits with a sale. But if you are a long-term investor, there's an equally good reason to hold on to the stock.
What does MP Materials do?
MP Materials mines for and processes rare earth metals. These metals are vital to modern technology, making the cellphones in your pocket work and the missiles that defend your country fly. They are important for everyday life and for those episodes when a nation needs to defend itself. Having a reliable supply of rare earth metals is vital.
Image source: Getty Images.
This is a problem because China is the world's largest provider of rare earth metals. It has had no qualms leveraging this fact when it deals with other nations. For example, during the recent tensions over tariffs, China has chosen to put limits on rare earth metals. It is not the first time this has happened. That has tech companies and entire countries worried about the safety of their rare earth metals supply.
Perhaps the most notable thing about MP Materials' business is where it is located. Operating largely in the United States, it is in an economically and financially stable region of the world. And as such, it should be a reliable provider to its customers. At the very least, it offers a secondary source of rare earth metals that should avoid the complications of being operated within a country known for using these materials as a bargaining chip.
Why you should hold MP Materials
All of the recent excitement around MP Materials really started when the U.S. government made a large investment in the business. That was quickly followed up with a supply agreement with Apple. And the price advance from these two deals led to the public sale of MP Materials stock, which was in such demand that the sale was upsized. All in all, the company raised around $1.5 billion.
The problem is that much of this money is going to go toward the capital investments needed to grow MP Materials' business. It is, at this point, still a money-losing start-up. It has a huge opportunity ahead, but that opportunity is likely to take years to develop. The price increase on the funding events is pricing in a lot of good news that simply has yet to transpire.
That's why investors who were hoping for quick gains might want to sell the stock. However, if you think in decades and not days, there's a long-term growth opportunity with MP Materials. And that opportunity, as noted, will play out over time because it simply takes time to build the type of mining and processing business that MP Materials is hoping to eventually operate.
The real benefit of all of the fresh capital is on the balance sheet. But most growth investors are likely to focus on the income statement, which will see little near-term benefit. What MP Materials now has is the cash it needs to keep moving its business forward as it looks to take advantage of the long-term demand that exists for rare earth metals. And given that there's really only one major supplier today, it has ample opportunity to take market share as it invests in its operations in the years ahead.
Short-term versus long-term
Whether or not you want to hold on to or sell MP Materials stock is likely to depend on your time frame. The stock is up a lot in a short period of time, but the long-term opportunity could be very large once the company has built out its business. That process will probably take years, and the swift stock advance has priced in at least some of the opportunity.
But it seems highly probable that there's a lot more opportunity here as the world looks to diversify its rare earth metals supply. Only that opportunity won't take shape over three months; it will play out over years and perhaps even decades. And that's a good reason to keep holding onto MP Materials stock, but only if you are a long-term investor.
