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Materials Stock

Electric Cars Cannot Be Built Without This Company

investing strategies materials Aug 19, 2021

 Electric Vehicles have been the talk of the auto industry for the better part of the last 10 years. However until somewhat recently, many car companies have been skeptical as to how mainstream they would become. But fast forward to today and it has become undeniably clear that these cars will be the future of ground transportation for the world! When we see companies like Ferrari, getting into the EV game, we know this trend is here to stay.

However, investing in the front end consumer vehicles isn't the only way to participate in the future of the industry. There are a handful of other companies operating behind the scenes, that stand to benefit greatly from this monumental shift. One of them is MP Materials.

MP Materials:

We've written about them before but MP Materials is the largest US-based miner of rare earths materials. Rare earths materials are needed to create rechargeable batteries for electric and hybrid cars. They also are used in a handful of other consumer products such as smartphones.

So if these products are the future of the economy (which we believe that they are), then companies like Tesla & Apple will be forced to buy these raw materials from companies like MP Materials.

So you may be wondering to yourself, "If this is all true, then why hasn't MP's stock shot up like crazy. There's two strong answers back to this.

MP Valuation:

The first answer is the valuation. With our forecasted EBITDA at $156M for this year, the stock is extremely expensive compared to that projection. Comparing that against other companies in their space we see that MP is trading at 43x revenue whereas other companies are at half the valuation.

So the key takeaway is that expectations are already extremely high for MP, but now they just need to "prove" their valuation. While the stock is up 11% this year, it pales in comparison to their return over the last year (~165%). Therefore we are waiting eagerly on their next few earnings reports that will hopefully prove out this justified price.


Competitive Forces:

The second answer is China. While MP is the largest miner in their class in the US, there is a lot of overseas competition. The largest competitor, China, historically has produced a lot of rare earths materials at lower prices. However, given the recent US/China relationship paired with increased shipping costs, we think that there is a chance that this naturally starts to tilt in MP's favor.

Add in another layer, where the US government might force US companies to use US miners, and there are sure some potential strong tailwinds in MP's favor.

Stock Outlook:

The upside for MP is clear and we're just using this time to reiterate our call on the stock. When we called them out earlier this year, growth stocks had more momentum fueling increased valuations. Since then the hype around these types of stocks have paired back, but it does not mean that we still don't love their upside.

The natural outcome is that now this thesis will just take longer to play out. Therefore we believe that while point one regarding valuations and their stock price is true, we also believe that the market just wants to see them justify this number. The second point regarding China has been a headwind to date, but is slowly flipping around. Once the guardrails fully come off and the market realizes this, we see this as a massive tailwind for MP over the next several years.

So with that context, we've therefore set a shorter term price target (below) to reflect market valuations over the near term. 

Price Target: $42

Target Date: Q1 2022

Rating: Overweight

Ticker: MP