Lithium Americas (LAC) saw a significant reversal of its gains in the past week as investors soured on the stock. Earlier, the U.S. Department of Energy took a 5% equity stake in the company and its Thacker Pass lithium project in Nevada. Shares surged by over 227% from Sept. 23 to an Oct. 14 close above $10.
Wall Street now believes the rally was overdone, as J.P. Morgan analyst Bill Peterson downgraded the stock from “Neutral” to “Underweight,” setting a $5 price target. This was a 50% downside from the price back then, and LAC stock has cratered to $7.09 as of this writing.
It is now down over 32% from its peak closing price, but it would take even more pain if it were to arrive at the aforementioned analyst's price target.
Now, does government backing truly validate Lithium Americas' business prospects, or is Wall Street correct in viewing this as an overheated momentum play?
Is the Government’s Investment Strategic or Tactical?
The crux of the problem is that analysts are split on whether Lithium Americas will receive sustained government support. The 5% stake came as part of a restructured loan agreement, not a vote of confidence in the company's growth prospects.
The restructuring allowed Lithium Americas to access the first $435 million of a previously announced $2.26 billion loan to develop the Thacker Pass mine, with the company committing to establish a loan reserve account funded with $120 million within a year. The Thacker Pass site is the largest deposit in North America.
Per a Trump administration official, "If we're going to push out part of the repayment into later years, then the administration would like a very small stake of equity to create essentially a cash buffer and eliminate some risk on behalf of taxpayers."
This means the government's priority might be protecting its loan investment rather than betting on Lithium Americas' upside potential.
Is Lithium Americas Overvalued Now?
LAC stock is down significantly from its peak and has even made a modest recovery from Friday's lows of ~$6.66.
The bearish analyst, Bill Peterson, said, "The incremental upside visible in the model is insufficient to justify Lithium Americas' current valuation" after taking dilution and revised loan terms into account. The broader analyst community is also skeptical of Lithium Americas.
Still, Peterson admitted that the Thacker Pass project has strong potential due to low-cost debt financing and a solid offtake agreement with General Motors (GM).
So yes, fundamentally, LAC stock is certainly overvalued. But this still does not mean that you should avoid it altogether.
Should You Buy LAC Stock?
Lithium Americas is not the only overvalued stock you should single out. Certain themes of the market are significantly overvalued when you look at their fundamentals, such as quantum computing, AI, nuclear, and many other rare earth stocks. What analysts are paying attention to is the potential and momentum.
In this case, LAC stock isn't a bad bet. The government is taking genuine stakes in companies like MP Materials (MP), Trilogy Metals (TMQ), and potentially in Critical Metals (CRML), too. This implies the equity stake the government has taken in Lithium Americas could be more than just offsetting the loan risk. In fact, the government could lend more support if the company gets into trouble, perhaps under the same pretext of reducing taxpayer risk.
U.S.-China trade tensions are heating up once more, so building a small stake in LAC stock during this dip is a good idea. If you are strictly a fundamentals-focused investor, though, I'd skip it.
