Lithium stocks that look cheap but aren't

Lithium stocks have been sold hard over the past few months. On a PE basis they now look cheap, and many investors see a buying opportunity. It may be a trap.

Most value investors are trained to buy stocks on low PEs when the fundamentals are shaken but not broken. That works for most companies, but it fails badly for cyclicals.

Seasoned investors know a rapid rise in cyclical earnings won’t last. The higher earnings climb, the less they will pay for them. When earnings collapse, they look past the trough and price in the recovery. So a cyclical’s PE contracts as earnings surge towards their peak and expands as earnings approach their trough.

Memory chip makers have been the textbook example for decades. Lithium producers have taught the same lesson in the past six years. Here is what the chip cycle says about lithium stocks today.

Memory chips: four booms, four busts

Memory chips behave like commodities. When demand runs ahead of supply, prices rise and producers build capacity. That capacity takes years to arrive and tends to arrive all at once. Prices fall, margins collapse and capex gets cut, which sets up the next shortage.

Micron’s (MU) history makes the point. Before AI, its earnings went through four boom-and-bust cycles in two decades. The 2010 boom came from post-GFC restocking and ended in a DRAM glut. The 2014 boom followed industry consolidation and ended with weak PC sales. The 2018 boom rode the cloud build-out and ended when hyperscalers paused spending. The 2022 boom came from Covid-era PC demand and ended in an inventory glut that pushed earnings below zero.

Micron's Share price, NTM EPS and PE

Note: red vertical lines represent earnings peaks; current EPS cycle exceeds the chart scale; PE chart is truncated at 30x.

Source: FactSet

Each time, the PE was lowest at the peak, between about 3x and 8x. As earnings started to fall, the PE stayed low and the share price kept falling. The bottom only came once the PE began to expand.

The AI capex boom has driven the latest surge. Consensus earnings are still rising, but MU trades on a single-digit multiple again. The market is trying to price the next peak before it arrives.

Lithium: two booms, two busts

The lithium price shows the boom-and-bust cycle as clearly as any market. Over the past five years, lithium carbonate tripled in five months, from about US$27,000/t in October 2021 to near US$80,000/t in March 2022. It stayed near those peak levels for most of 2022. It then fell almost 90%, to around US$8,300/t by mid-2025. It tripled again to about US$28,000/t by mid-2026, then fell about 40% to US$15,500/t in October.

Source: FactSet

The first boom began with Chinese EV sales. New energy vehicles (NEVs) were about 5% of China’s new car sales in 2020. Beijing then set a target of 20% by 2025, backed by subsidies and a credit mandate on carmakers. An industry roadmap pointed to 40% by 2030 and more than half by 2035. Within a year, the NEV share more than doubled to 13%, and lithium demand outran supply.

High prices then drew in new supply. Sigma Lithium’s Grota do Cirilo mine in Brazil began commissioning in December 2022. At full capacity it can produce about 4% of 2023 global supply. It was an early sign of the supply wave that arrived in 2023. Global mine output rose 23% that year, from 146,000 to 180,000 tonnes of lithium. Australia and China each added close to a third of the increase. Brine expansions in Chile and new operations in Argentina, Canada, Zimbabwe and Brazil added the rest. Supply outgrew demand, and prices collapsed.

The second boom had a supply disruption and a new buyer. In August 2025, CATL suspended its Jianxiawo mine after its licence expired. The mine had supplied 8% to 10% of China’s lithium carbonate, about 3% of global supply. Futures jumped 8% on the day. The real surge came from late 2025, driven by grid storage at home and abroad. China installed 189.5 GWh of new storage in 2025, roughly doubling its total, with a third of that in December alone. Overseas orders for Chinese storage batteries more than tripled in 2025, led by the Middle East, Australia and Europe. Storage rose from 24% of China’s battery cell production in mid-2025 to 40% by October, and inventories fell as demand outran supply.

High prices did what high prices always do. By May 2026, mines closed in the last downturn were restarting in Australia, Zimbabwe had resumed exports and Jianxiawo was moving toward approval. Inventories then turned out larger than reported. Chinese futures fell 53% by late October. This was not a demand problem. China’s battery output was still up 57% on a year earlier in September, but supply grew even faster.

The second peak was also only a third of the first, despite far stronger demand. That is structurally bearish. If US$28,000/t was enough to bring idle mines back, the next rally will likely hit the same wall of supply.

Why lithium stocks aren’t cheap yet

The lithium stocks have followed Micron’s script. Take US-listed Albemarle (ALB), one of the world’s largest lithium producers, and three ASX peers: PLS Group (PLS), Mineral Resources (MIN) and IGO Limited (IGO). When lithium earnings first peaked in early 2023, all four traded on 6x to 8x NTM earnings. Over the next two years, consensus earnings fell close to zero and PEs blew out. Earnings recovered from late 2025 and peaked again in mid-2026. This time investors paid more, with the four trading on 10x to 14x. My guess is they saw US$28,000/t lithium as more sustainable than US$80,000/t, and valued the earnings accordingly.

Share price, NTM EPS and PE for Albemarle (ALB), PLS Group (PLS), Mineral Resources (MIN) and IGO Limited (IGO)

Note: red vertical lines represent earnings peaks. Source: FactSet

In Micron’s cycles, the bottom came once the PE began to expand. The lithium stocks did the same in 2025, as earnings fell toward zero. That is not happening this time. Since the mid-2026 peak, their PEs have fallen or held flat. Share prices are falling at least as fast as earnings forecasts, which suggests the market expects more downgrades.

3 lessons for lithium investors

Buying on a low PE works for most stocks, but not for cyclicals. The history of memory chip stocks points to three better rules, and all three apply to lithium stocks.

1. When fundamentals are red hot, a low PE often marks the top. Micron on 5x in 2022 and the lithium stocks on 6x to 8x in 2023 both went on to lose most of their earnings.

2. Watch supply, not the demand story. For memory it was PCs, then cloud, now AI. For lithium it was EVs, then grid storage. Supply ended each boom.

3. When earnings have collapsed, a high PE often marks the bottom. Micron’s PE surged in late 2022 as earnings fell toward losses, before the cycle turned. The lithium stocks’ PEs surged in 2024 and 2025 as profits fell toward zero. For ALB, PLS, MIN and IGO, earnings are falling, but their PEs have not started to climb.

Would you buy lithium stocks on 10x earnings, or wait for the PE to expand? Let me know in the comments.

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