Is the bubble bursting? Novonix (ASX:NVX) share price plunges 27%

After a cracking year so far, Novonix shares have taken a dive…

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The Novonix Ltd (ASX: NVX) share price is tanking today. At last check, shares are down 26.58% on a volume of 134% of its 4-week trading average.

There's been no market-sensitive information out of Novonix today. However, the battery materials and technology company has shrugged off a wider-market selloff of late and remains up nearly 640% this year to date. At the time of writing, Novonix shares are exchanging hands at $8.92 apiece.

However, not all those familiar with the company are as rosy on its outlook. Could the bubble be bursting for Novonix? Let's take a closer look.

Lithium continues its flight

The spot price of lithium has continued its upward trajectory in November. This comes as rising demand for electric vehicles (EV) and renewables underscored the costs of the raw material.

Deliveries of EVs to China, the world's largest importer of lithium-ion batteries, is expected to be double that of last year and total around 3 million units, Trading Economics says.

The dynamics of demand and supply for lithium — and lithium-style batteries, specifically — have bolstered prices for the metal in 2021. That's according to analysis from Goldman Sachs, FactSetStatista the International Energy AgencyCRU Group, Roskill, and Bloomberg Intelligence.

These price gains are a net positive for battery specialists such as Novonix and their margins, according to these experts. Reuters confirms this dynamic in a report from August 2021. It says the "lithium-ion battery sector is benefitting from rising prices of the raw material [lithium] amid robust demand".

Is the bubble bursting?

Looking at the industry on a macro-thematic level – absolutely not, according to the bulk of analysis on the EV, lithium-ion battery, and lithium mining sectors.

Demand for batteries looks set to continue rising into the coming periods. This, combined with the push away from fossil fuels in energy and fuel production, could see widespread adoption in the global economy.

However, former Bank of America asset manager Tom Richardson, referencing Novonix in yesterday's Australian Financial Review, said there are "dozens, or perhaps hundreds, of other lithium or green-focused businesses that will rely on positive sentiment and announcements (rather than cashflows) to justify staggering valuations over the next 12 months".

Richardson submits there is a disconnect between share prices and underlying fundamentals in the industry. For instance, he states Novonix recently reached a market capitalisation of $6 billion on revenue of just $1.6 million for the previous quarter.

The report also notes that during the quarter, Novonix spent just $906,000 on research and development, but spent $1.5 million on product and operating costs.

Not only that, the company has issued equity to secure almost $249 million in cash on the balance sheet. US company Philips 66 also took a 16% stake in the company in August via a US$150 million equity investment for almost 78 million shares.

Further analysis

Analysts at Morgans Financial also rate Novonix as a 'hold' and value the company at just $7.50 per share. Further analysis obtained from Bloomberg Intelligence shows the company's return on invested capital (ROIC) of -9.12% is lower than its cost of capital at 9.4%. It therefore misses this hurdle with an 18% spread.

Moreover, Bloomberg also shows the company is trading at 678x sales, and that investors are paying more than 21x its book value of equity to invest right now. That's a substantial premium to the median values of its peer group.

What impact this will have on the Novonix share price is yet to be seen.

What's next for the Novonix share price?

In reality, it is unwise to try and accurately predict the rise and fall of market/company bubbles, or even extended market movements either way.

The fact is Novonix is centred in a high-growth industry that is currently at scale and has a unique product that aims to improve the battery technology sector.

However, listed companies in the industry are trading at lofty valuations, and some experts are questioning whether these valuations are justified on the basis of company-specific fundamentals – not so much the lithium industry itself.

With this in mind, investors will be seeking names such as Novonix to justify their valuations in the near future, according to the commentary analysed for this report.

Novonix continues to shrug off these short-term headwinds. The Novonix share price has rocketed 725% over the last 12 months. It's also up more than 11% in the past month.

The author has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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