AGL Energy Ltd (ASX: AGL) and Pilbara Minerals Ltd (ASX: PLS) shares are both interesting potential investments to think about because of the exposure they can provide to the growth of energy-related demand.
These businesses are constituents of the S&P/ASX 200 Index (ASX: XJO), but that doesn't mean they're immune to volatility. As the chart below shows, their share prices have declined significantly over the past few years.
In the last five years, the AGL share price has fallen around 50%, while the Pilbara Minerals share price has dropped 42% since August 2023. Of course, a lower share price doesn't necessarily mean they excellent buys. But it's still worth analysing and comparing both shares.
Energy prices are key
It can be quite difficult to predict what's going to happen next with lithium prices or electricity prices.
AGL is an energy generator and retailer, so it benefits when energy prices go up. Pilbara Minerals is a major lithium miner, so it will benefit if lithium prices rise amid the rise of electric vehicles.
The broker UBS recently noted that near-term wholesale prices have increased. UBS also increased its expectation for wholesale electricity prices to $90MW per hour (up $10MW per hour), reflecting "a slower build out of renewable and transmission capacity, higher levelised cost of energy (LCOE) for new generation and an updated forecast of thermal generation and storage utilisation."
The energy retailer's net profit after tax (NPAT) is expected to grow at a compound annual growth rate (CAGR) of 9% between FY26 and FY29.
Sadly, lithium prices are not looking as positive. UBS said it sees a spot price for lithium spodumene of between US$1,050 to US$1,075 as a "fair reflection of a well-supplied market."
UBS suggested that "continued downside risk remains while supply out of Africa is strong and demand for PHEV [plug-in hybrid electric vehicle] stagnates."
The broker is wary of Pilbara Minerals' recent announcement to expand the Pilgangoora operations with its P2000 project. Taking the production to 2mt per annum would reportedly see it rival Greenbushes as the world's largest spodumene mine. However, "project announcements like this and Manono will likely push out a return to incentive based prices and keep prices near current marginal cost support levels."
If electric car demand were to recover to a satisfactory level of growth, it could lead to higher lithium prices. AGL can benefit from increasing energy demand from areas like data centres, AI, electric vehicles and a growing population.
My verdict on AGL and Pilbara Minerals shares
Pilbara Minerals doesn't seem to be doing itself or the lithium price any favours by aiming for such large annual production.
I don't think it's clear that the lithium price will recover to previous strong levels, particularly if supply keeps increasing.
AGL can benefit from rising energy prices, investments in energy storage, and growing demand from data centres.
If AGL can grow its profit and dividend in the coming years, I think the business could be a materially undervalued opportunity at today's prices. That's why I recently decided to invest in the ASX share, and it would be my pick today.
According to the UBS estimates, the AGL share price is valued at 10x FY25's estimated earnings.
