SQM's 2025 Profit Rebound Masks Overvaluation and Persistent Risks

What happened

SQM reported a dramatic earnings recovery for 2025, swinging from a US$404.4 million loss to a US$588.1 million profit, driven by improved lithium market conditions. This turnaround follows a severe price downturn that compressed gross margins to 26.8% in early 2025, as highlighted in the DeepValue report. However, the stock has already surged 105% over the past year, trading at elevated multiples of 44x P/E and 22x EV/EBITDA, which embed a full lithium recovery premium. The report warns that SQM's heavy capex commitments and rising leverage, with net debt at US$3.44 billion, increase vulnerability if lithium prices weaken. Moreover, ongoing ESG and regulatory risks in Chile's Atacama region threaten long-term capacity growth, making current valuations appear stretched.

Implication

SQM's earnings recovery confirms operational resilience but does not alter the fundamental risk-reward imbalance at current prices, where the stock trades near the base case value of $80 with minimal upside. The company faces substantial capex of ~US$2.7 billion over three years and regulatory scrutiny in Chile, which could impair returns if lithium demand underperforms. With net debt elevated and dependency on Atacama approvals, any price retracement below US$15k/t or new ESG restrictions could trigger a sharp de-rating toward the bear case of $60. Investors should trim positions on strength and wait for a pullback to more attractive entry levels around $60-$65, as the payoff profile favors patience over conviction. The report's POTENTIAL SELL rating remains intact, emphasizing that multiple compression is more likely than sustained appreciation from here.

Thesis delta

The earnings report does not shift the investment thesis; it merely validates the cyclical recovery already priced into the stock. If anything, it reinforces the need for sustained lithium prices above US$25k/t and margin expansion to justify current multiples, which remains uncertain given capex intensity and Chilean overhangs. No material change is warranted, maintaining a cautious stance with a focus on risk management.