Is Arcadium Lithium plc (ALTM) the best small-cap EV stock to invest in?

We recently published a list of 11 small-cap EV stocks worth investing in. In this article, we’ll take a look at where Arcadium Lithium plc ( NYSE:ALTM ) stacks up against other small-cap EV stocks worth investing in.

Over the past few years, the electric vehicle (EV) industry has been growing at a rapid pace. However, it faces some challenges that are slowing down its development. However, this does not mean that the industry is standing still. Over time, it is well on its way to completely taking over combustion engines.

The transition to electric vehicles is proving more difficult than anticipated, with consumer demand falling short of expectations, due in part to a lack of charging infrastructure and the complexity of the transition from traditional fuel technologies.

A Sept. 10 report by CNBC found that European automakers face a number of challenges in the transition to electric vehicles, prompting several companies to rethink their roadmaps. Volvo recently abandoned its goal of selling only electric vehicles by 2030. Instead, it prefers to remain flexible and include hybrid models in its lineup.

Other major automakers such as Volkswagen, Ford and Mercedes-Benz are similarly delaying plans to phase out internal combustion engine vehicles due to market uncertainties, including slower infrastructure development and changing government incentives.

Despite these short-term setbacks, experts believe that automakers will continue to invest in electric vehicles to maintain their position in the market.

Competitive advantage of Chinese electric vehicle manufacturers

While growth in the US and Europe is slowing, China is accelerating at a significant pace and is dominating the electric vehicle landscape. According to a report by the World Economic Forum, Chinese electric vehicles are significantly cheaper than their Western counterparts, with an average price of $34,400 compared to $55,242 in the US. The price difference is due to lower labor costs, favorable government subsidies and cheaper sources of battery supply.

Chinese automakers now produce more than half of the world’s electric vehicles and are using their cost advantage to potentially dominate the global market. As Chinese brands gain scale and expertise, their competitive pricing could allow them to challenge Western automakers.

Western electric vehicle market compared to China

While Tesla remains a strong competitor to China, other U.S. and European automakers have been slower to compete effectively due to high prices and limited electric vehicle options. However, the U.S. government and private sector are also seeking to expand the industry and become the dominant force in the electric vehicle industry.

According to a Reuters report published on September 23, Monroe Capital LLC announced its intention to launch a new fund, Drive Forward Fund LP, which aims to raise up to $1 billion to provide loans to smaller auto suppliers as the industry transitions from ICE vehicles to electric vehicles.

The White House supports this move and said the fund will help small and mid-sized automakers access affordable capital to refinance, grow and diversify their businesses, and will benefit more than 250,000 automakers.

The recent introduction of new U.S. tariffs on Chinese electric vehicles, combined with the need to comply with stringent emissions regulations, is forcing automakers to adapt their supply chains.

Monroe CEO Ted Koenig said the fund will be essential to driving growth and innovation in the automotive supply chain. Many small and medium-sized suppliers are currently struggling to secure financing, limiting their ability to transition to electric vehicle parts production.

Apart from this, we also covered the DOE’s move to boost EV business in the US in our article on 8 Best Electric Vehicle Stocks to Buy According to Short Sellers. Here is a fragment of the article:

“…The U.S. Department of Energy (DOE) reported on July 11 that the Biden administration, through the DOE, announced $1.7 billion in grants aimed at converting 11 troubled auto manufacturing plants in eight states to produce electric vehicles (EVs) and their vehicle components.

The move is part of President Biden’s broader Investing in America initiative to revitalize manufacturing communities and protect union jobs. The subsidies are intended to keep the U.S. auto industry competitive, especially as global rivals invest heavily in electric vehicles. The program, funded by the Inflation Reduction Act, will help retain more than 15,000 union jobs and create nearly 3,000 new positions in selected facilities. These plants will produce a wide range of electric vehicle products, from parts for electric motorcycles to batteries for heavy trucks.

Cox Automotive’s Erin Keating is also bullish on the U.S. EV industry, noting in an interview with CNBC Power Lunch that competitive leasing arrangements are putting downward pressure on used EV prices. He sees this as a positive because more leased vehicles will eventually enter the used market, ensuring a steady supply of affordable electric vehicles.

Responding to concerns about EV infrastructure and range concerns, Keating assured consumers that used EV batteries perform well and experience minimal degradation. He expects consumer confidence and the popularity of electric vehicles to increase as infrastructure improves.

Our methodology

For this article, we’ve compiled a list of 20 small-cap stocks involved in the electric vehicle industry as of September 25. Our small cap threshold is $1 billion to $10 billion. We’ve narrowed our list to the 11 stocks most widely held by institutional investors. 11 small-cap EV stocks to invest in are listed in ascending order of hedge fund sentiment.

Why are we interested in stocks that hedge funds invest in? The reason is simple: our research has shown that we can outperform the market by imitating the best stocks of the best hedge funds. As part of our quarterly newsletter strategy, we select 14 small- and large-cap companies every quarter, and since May 2014, we have returned 275%, outperforming our benchmark by 150 percentage points (see more details here).

Arcadium Lithium plc (NYSE:ALTM)

Number of hedge fund holders: 19

Arcadium Lithium plc (NYSE:ALTM) focuses on the production of lithium-containing chemical products in the Asia-Pacific region, North America, Europe, the Middle East, Africa and Latin America. Lithium is a key ingredient in electric vehicle batteries. The company is one of the best electric vehicle companies worth investing in.

The company specializes in a variety of lithium extraction methods, including hard rock mining and direct lithium extraction (DLE), which produces high-purity lithium products such as lithium hydroxide and lithium carbonate.

During the inaugural Investor Day on September 19, the management board shared ambitious plans for the future. They expect a 25% increase in combined lithium carbonate and lithium hydroxide volumes in 2024 and 2025.

The increase is due to completed expansion projects at the Fénix and Olaroz plants, which are currently operational and do not require additional capital investment. In addition to these immediate achievements, the company is focused on expanding its broad portfolio of assets in a manner consistent with market demands and customer needs.

Arcadium Lithium (NYSE:ALTM) has unveiled a two-wave expansion plan for its high-quality and profitable assets located in Argentina and Canada. The first wave, which includes four existing projects at various stages of development, is expected to be completed by 2028, with forecasts indicating a doubling of current sales volumes.

Subsequently, a second wave of initiatives, still in the development and planning stages, provides the opportunity for a significant increase in production capacity, targeting an increase of between 125,000 and 295,000 metric tons of lithium carbonate equivalent (LCE) after 2028.

The company has a clear path to achieving projected adjusted EBITDA of $1.3 billion by 2028, subject to certain market conditions.

The forecast is supported by low operating costs and long-term customer contracts that help maintain healthy profit margins. Moreover, anticipated price increases in the lithium market could boost revenues and spur supply growth across the industry.

Since the January 2024 merger of Allkem and Livent to create Arcadium Lithium (NYSE:ALTM), the company has been actively implementing cost-cutting measures. With savings expected to reach $80 million in 2024, the company now expects to reach its original goal of $125 million by the end of 2025, about two years ahead of schedule.

Efficiencies result from organizational restructuring, operational synergies and a streamlined supply chain, indicating the potential for even greater savings in the long term.

In its Q2 2024 investor letter, First Pacific Advisors stated the following regarding Arcadium Lithium plc (NYSE:ALTM):

“Arcadium Lithium plc (NYSE:ALTM) is an integrated, low-cost and well-managed lithium producer formed by the merger of fund-owned Livent and Allkem in Australia. The merger was finalized at the beginning of the year, and we received and decided to retain Arcadium shares. The share price has fallen on volatile lithium prices, which have fallen from buoyant levels in early 2023.27 Electric vehicle production estimates are slowing, with production capacity outpacing demand; the industry is now waiting for the supply response.

Arcadium is an unusual investment for us. We tend to avoid the commodities and materials sectors and our position in Arcadium is small. However, we believe that Arcadium is uniquely positioned in the industry with strong long-term prospects. The company has low-cost production assets, is virtually debt-free, and plans to significantly expand production capacity in the near future.”

Overall, ALTM ranks 8th on our list of small-cap EV stocks worth investing in. While we recognize the potential of ALTM as an investment, our belief is based on the belief that AI stocks have a greater chance of delivering higher returns in a shorter period of time. If you’re looking for AI stocks that show more promise than ALTM but trade at less than 5x earnings, check out our report on the cheapest AI stocks.

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Disclosure: None. This article was originally published on Insider Monkey.