Stock Analysis & Ideas

Here’s How SQM Stock Will Benefit from the EV Transition

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SQM delivered another earnings surprise as it currently operates in a highly conducive market. Robust lithium prices have pushed its earnings into high gear and will continue move the needle for SQM stock.

Sociedad Química y Minera de Chile (NYSE:SQM) is a leading global producer of lithium, potassium, and other minerals and chemicals. Its lithium segment has witnessed incredible demand over the years due to the growth of electric vehicles. Consequently, SQM’s share price has shot up by over 100% in the past five years. SQM will uniquely benefit from the EV storm, which is why we are bullish on SQM stock for the long haul.

Many believe that SQM’s free cash flow growth rates will normalize in 2023, and we could concur with that notion. However, lithium prices should remain relatively strong for the better part of next year, with strong demand from the EV sector and other markets. Moreover, SQM should benefit from its low-cost structure. The company has long been a low-cost lithium producer, and this competitive advantage will continue to boost its bottom line.

Furthermore, SQM’s regulatory obstacles have cleared out in the past few months. Chile’s mining sector has come under increased scrutiny recently, with many calling for greater environmental protections. In response to this pressure, the Chilean government proposed a new constitution that would have included stronger environmental protections.

However, voters rejected the proposed constitution, effectively removing any barriers to SQM’s operations. The defeat of the proposed constitution also clears the way for SQM to continue investing in its operations in Chile.

Hence, SQM’s demand drivers are incredibly strong. Decarbonization has become a major talking point for world governments investing billions in laying the foundations for long-term decarbonization. Therefore, the world is seeing demand for lithium rise to levels never before seen, and SQM stands to ride this trend to new highs.

SQM Delivered a Third Quarter Smasher

SQM delivered blow-out third-quarter results, where revenues soared over 347.4% to $2.96 billion from the prior-year period. Moreover, revenues beat analyst estimates by $180 million, while GAAP Earnings per American Depositary Receipt came in at $3.85, beating estimates by almost $0.50. Also, its gross profit for the quarter reached $1.63 billion, a colossal improvement from the $224.8 million recorded in the same quarter last year. Additionally, net income for the last nine months improved by 944% year-over-year.

SQM’s third-quarter results were an absolute smasher, setting it up for incredible gains. Its management has believed in the depth of the lithium market for years and has invested heavily in research and development, expanding the firm’s capacity at an incredible pace. Indeed, SQM’s CEO, Ricardo Ramos, talked about how the firm could effectively meet production goals. Additionally, management believes that lithium prices are likely to remain high in the upcoming quarter.

Is SQM Stock a Good Buy?

Turning to Wall Street, SQM stock maintains a Strong Buy consensus rating. Out of six total analyst ratings, five Buys, one Hold, and zero Sell ratings were assigned over the past three months. The average SQM stock price target is $124.67, implying 27.64% upside potential. Analyst price targets range from a low of $106 per share to a high of $141 per share.

Conclusion: SQM Stock is Positioned to Benefit from Clean Energy Adoption

Lithium demand is skyrocketing as the world shifts to clean energy, and SQM is in the perfect position to take advantage. The company is a juggernaut in the lithium market, and its shares have soared over 80% in value year-to-date. It’s operating in a highly conducive market where robust lithium prices have pushed SQM’s earnings into high gear. As we advance, the firm expects to increase production by 20% by 2023-24.

The Inflation Reduction Act is a huge win for the lithium and EV industry. It’s the first of many catalysts that will drive demand for lithium in the coming years as the world increasingly turns to clean energy.

For investors looking to profit from the shift to clean energy, SQM is a can’t-miss opportunity. Its regulatory roadblocks are firmly in the rearview mirror, which positions it for greater success ahead. Additionally, SQM stock offers a 3.97% dividend yield, further sweetening the deal for new investors.

Disclosure

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