Lithium is a key component of batteries for electric vehicles (EVs), which are expected to see a surge in demand in the coming years. However, lithium prices have been volatile in the past year, causing the best battery stocks to reach record highs in late 2022 before falling sharply in early 2023 due to oversupply and weak demand from China, the world’s largest EV market.
However, some analysts expect lithium prices to rebound in the near and medium term, as supply remains tight, and demand picks up from other regions such as Europe and North America. According to Australian Resources & Investment, lithium hydroxide prices are expected to average $46,746 per ton in 2023, before dropping to $30,357 by 2025. These prices are still historically high compared to the average of $12,163 across the three years to 2021, which underscore the sticky demand undergirding these prices.
For investors who want to capitalize on the lithium boom, here are three of the best battery stocks that could offer attractive returns.
Tesla (NASDAQ:TSLA), the world’s leading EV maker, is also a pioneer in battery technology. The automaker has been able to amass a large, loyal customer base and a strong brand image that sets it apart from its competitors. Tesla delivered over 1.3 million EVs in 2022, up 40% year-over-year, and the automaker looks on track to break another record this year.
Tesla’s competitive advantage lies in its cutting-edge battery technology, which leverage a cylindrical shape and dry coating to enable the production of high-performance and long-range EVs at affordable prices. The automaker has made investments into its plants in Texas and Nevada to slowly wean itself off of third-party suppliers. The reason here is straightforward. There will be less supply chain risks and more tax credits incentives from the Inflation Reduction Act.
In 2023, quarterly earnings have come in above analysts’ estimates, and the price cut strategy the automaker began to pursue in the beginning year has increased quarterly deliveries while also placing pressure on gross margins. This combination of factors has led to heightened volatility for the famed EV stock, but shares are still up 129% year-to-date (YTD).
Positive secular trends in consumer preferences and strong EV sales across the board this year should keep potential investors interested and current shareholders happy.
It is difficult to make a list on battery stocks without mentioning the world’s second largest EV battery supplier. BYD Co. (OTCMKTS:BYDDY) garnered a number of achievements recently. The Chinese automaker has managed to dethrone Tesla as the world’s largest EV maker, but BYD will not stop there. The company also plans to play a direct role in supplying battery technologies to the burgeoning electric vehicle sector. BYD has even ousted LG as the world’s number 2 EV battery supplier.
However, BYD’s stock price has not performed so stunningly YTD. Shares have only risen 21%, which just pales in comparison to its competitor Tesla. That’s why the stock remains very attractive. Much of the reason attributed to BYD’s lackluster share performance has mostly due to the bad press China’s economy has been getting. Sure, the property market may be facing a slump, but new economy sectors such as semiconductors and electric vehicles have continued to outperform in terms of growth.
BYD, in its own right, has been consistently growing its monthly sales and market share in both domestic and international markets. Valuation also remains much cheaper than Tesla, trading at 25x forward earnings versus Tesla’s 63.9x forward earnings.
Sigma Lithium (SGML)
Different from the two automakers who happen to have battery operations, this Canadian company is more of a pure-play lithium producer. Sigma Lithium (NYSE:SGML) owns and operates the Grota do Cirilo lithium mine in Brazil. The lithium producer started this project all the way back in 2012 and after receiving enough investment, was finally able to start construction in 2021. While Sigma Lithium is still pre-revenue, the lithium producer is looking to produce 130,000 tons of lithium concentrate in 2023.
Sigma Lithium has been able to sign a multi-year off-take agreement with LG and is in preliminary term-sheet talks with Mitsui & Co. (OTCMKTS:MITSF). Shares in the lithium producer have performed well since the start of the year, despite the slump in lithium prices: shares are up 26%. As demand for electric vehicles continued unabated, lithium demand should continue to be elevated in the short run. With current production levels going as planned and future annualized production capacity expected to improve, investors have a lot to be hopeful for.
On the date of publication, Tyrik Torres did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.