The lithium battery market is booming in 2023, thanks to the surge in electric vehicle sales. Consumers are switching to greener and cheaper alternatives to gas-powered cars, and governments are offering incentives and subsidies to encourage the transition. However, on the supply side of the market, a glut of lithium, precipitating from the rise of lithium projects worldwide, especially in Australia and South America, has caused prices to largely decline in 2023. Lithium is a key ingredient for making lithium-ion batteries, which power most electric vehicles. The demand for lithium has surely soared in recent years, but so has the supply. As a result, lithium prices have dropped 68.7% since the start of the year. This is bad news for many lithium producers and battery stocks, especially those with high production costs and low margins.
Other battery producers, including recyclers and fuel cell designers, could also be affected by either this downward trend or just company specific risks. Below are three battery stocks investors would do well avoiding before they damage their portfolios.
Li-Cycle (LICY)
Li-Cycle (NYSE:LICY) is a company that recycles lithium-ion batteries, recovering valuable metals such as lithium, cobalt and nickel. The company claims that its process is environmentally friendly and cost-effective, and that it can help reduce the dependence on mining for new materials. Unfortunately, despite its good intentions for the environment, Li-Cycle’s business model lacks enough catalysts to foment robust long-term growth. The company relies on a steady supply of used batteries, the constant availability of which is never certain, and of course there is the difficulty of selling used batteries in market where there is a lithium glut already.
The company also has incurred high operating costs to deploy its recycling process. While quarterly revenue in 2023 has declined on a year-over-year basis, operating costs have ballooned, chipping away at any hopes of near-term profitability. Li-Cycle is also burning cash at an alarming rate. The battery recycler ended 2022 with a $517.9 million cash balance, but this figure has declined to $288.8 million as of their last quarter. With Li-Cycle’s financial position in limbo, investors should steer clear.
PowerCell Sweden (PCELF)
PowerCell Sweden (OTCMKTS:PCELF) is a company that develops and produces fuel cell systems, which convert hydrogen and oxygen into electricity and water. The company targets applications such as heavy-duty vehicles, marine vessels and stationary power generation. Though virtuous calls for sustainability and environmental consciousness have spurred a rush to develop fuel cells, the demand for these products as well as their production practicality are still up in the air.
Similar to Li-Cycle, the company faces burgeoning operating costs without any meaningful increase in top-line figures. In the second quarter of 2023, Y/Y sales growth appeared anemic when compared to first quarter figure growth. This suggests demand for PowerCell’s product is unstable and not grounded in any strong secular tailwinds. Investors looking to grow their portfolio with a hydrogen play should not place too much hope in this or the other battery stocks we mentioned.
QuantumScape (QS)
QuantumScape (NYSE:QS) is another battery stock attempting to develop a market for unconventional batteries. In particular, QuantumScape is a developer of solid-state batteries, which are supposed to be safer, faster-charging, and longer-lasting than conventional batteries. I wrote about this company before, but I believe it deserves another entry.
The solid-state battery develop still happens to be in early stages of its technology development, and it has not yet proven that it can mass-produce its batteries at a commercial scale or at a competitive cost. That has not stopped equities speculators from pumping up QuantumScape’s shares in late 2020. Since then, QuantumScape’s shares have plummeted back to reality from their peak of $131.67 in December 2020 to $6.69 as of September 29, 2023, which represents a drastic 94.9% decline. Allegations of fraud and misrepresentation have harmed QuantumScape’s reputation. Investors still holding this stock should cut their losses before more speculation and volatility leads to further disappointment.
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.
