Pilbara Minerals Ltd (ASX: PLS) stock delivered a market-beating performance in September, rising by 10.1% compared to gains of just 2.2% for the S&P/ASX 200 Index (ASX: XJO).
Interestingly, Pilbara Minerals stock has dropped 6.7% since the end of September, at the time of writing, so the company is now a fair bit cheaper than it was just a week ago. Plus, it's still down by around 23% in the year to date.
The ASX lithium share has suffered through significant volatility amid wide swings in supply and demand for lithium over the last couple of years, causing dramatic shifts in the commodity's price.
Towards the end of September, however, investors seemingly became excited over the Chinese announcement of economic stimulus and its potential to positively impact ASX mining shares like Pilbara Minerals.
Are things looking better for the ASX lithium share?
The broker UBS said the recent China news "will likely have some demand implications" for lithium. However, UBS still sees the market as "oversupplied". That view, combined with the recent rally in the Pilbara Minerals share price means the broker still thinks the stock is trading "relatively expensively" and it maintains a sell rating on the ASX lithium share.
Furthermore, UBS noted the latest wave of supply coming online from China and Africa, and its potential to negatively impact lithium prices. However, the broker still maintains lithium demand is growing at a compound annual growth rate (CAGR) of 20%.
UBS said:
Eventually, we will need to incentivise the next wave of projects and that may require a long-term price of US$1,400/t SC6 CFR China.
Can the Pilbara Minerals stock price rise?
If lithium prices rise to higher-than-expected levels, then this ASX lithium stock could well surprise to the upside.
However, as mentioned, UBS has a sell rating on Pilbara Minerals stock, with a price target of $2.20. A price target is the level at which a broker thinks a stock will be trading in 12 months from the time of the broker note. Therefore, UBS is suggesting the Pilbara Minerals share price could decline by almost 28% from current levels. Ouch!
Of course, broker price targets are in no way guaranteed to translate into reality.
But UBS is predicting a significant reduction in profit (again) in FY25 for Pilbara Minerals, with net profit of just $69 million on $918 million of revenue as the miner invests heavily in its Pilgangoora project. That profit decline is forecast despite the company's production guided to grow from 725.3kt in FY24 to between 800kt to 840kt in FY25.
In FY26, however, UBS predicts Pilbara Minerals will grow its net profit to $203 million as production increases and upgrades start to pay off. However, at the current Pilbara Minerals share price, that profit would represent a price/earnings (P/E) ratio of more than 40.
By FY29, the ASX lithium share could generate $1.2 billion of annual net profit, according to UBS' long-term forecasts. With that expected FY29 profit generation, the ASX lithium share is valued at 8x FY29's estimated earnings. Considering the end of FY29 is essentially five years away, it's understandable that UBS is wary of the current valuation of the lithium miner.
