Are Pilbara shares worth buying right now?

Is the current Pilbara stock price low enough for me to buy?

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Pilbara Minerals Ltd (ASX: PLS) shares have been on a wild ride for the last few months. This ASX 200 lithium stock has arguably always been a volatile one. But investors have endured some particularly rough moves over the past few months.

To demonstrate, it was only in August last year that Pilbara shares were trading at over $5.40 each. But today, those same shares are worth just $3.95 at the time of writing. That puts Pilbara down more than 26% from its August levels, as well as down almost 10% from where the company was at back at the beginning of March this year.

At the current stock price, Pilbara is trading on a price-to-earnings (P/E) ratio of 8.74 – a low earnings multiple by current ASX 200 standards.

So does this mean Pilbara shares are worth buying right now? After all, most investing experts tell us to 'buy low' and 'sell high'.

Are Pilbara shares an ASX 200 buy right now?

Well, in my opinion, the answer is unfortunately 'no'.

Pilbara is a quality company to be sure. It is the largest pure-play lithium stock on the ASX and has economies of scale and established cash flows that most of its smaller rivals can only dream of.

However, that doesn't automatically make it a good investment in my eyes. Lithium is the only commodity that this company has serious operations extracting. When lithium prices are high, this is great for Pilbara. We saw this on full display over 2021 and 2022, which saw Pilbara's revenues and profits skyrocket and even allowed the company to pay out its first-ever dividend – a feat previously unheard of on the ASX lithium scene.

However, this also means that Pilbara doesn't have any earnings base support when the price of lithium drops to a low point in its pricing cycle – which is an inevitability. All commodities are cyclical, but lithium has proved to be exceptionally so in recent years. This reality makes it very difficult for me to recommend Pilbara shares as a good long-term investment.

The only resources stocks that I would consider worthy of that title are those high-quality companies that have efficient, low-cost operations in multiple commodities. The likes of BHP Group Ltd (ASX: BHP) or South32 Ltd (ASX: S32) spring to mind in this arena.

Foolish takeaway

With a pureplay stock like Pilbara though, its fortunes are entirely dependent on one commodity's price. That makes Pilbara an inherently risky investment in my view, and one that isn't worthy of a significant allocation in anyone's portfolio.

Sure, it will probably deliver some meaningful gains during a pricing boom. But the chances of investors losing all of those gains and then some in a downswing are very real. So this is one I'll be staying away from.

Motley Fool contributor Sebastian Bowen 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 Scott Phillips.

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