Could Investing $5,000 in USA Rare Earth Help Make You a Millionaire?
Key Points
USA Rare Earth could become strategically important to the U.S. government.
Its rare-earth materials are needed for industrial and consumer applications.
The company's recent acquisition of Serra Verde gives it a new revenue stream.
The U.S. has a magnet problem. A rare-earth magnet problem.
Pretty much every electronic you use, from smartphones to computers, requires rare-earth magnets to function properly. Indeed, these tiny, powerful magnets are even more ubiquitous than one might think, with applications in electric vehicles (EVs), wind turbines, medical equipment, weapons, and industrial machinery.
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At the same time, the U.S. does not have a strong domestic supply of rare-earth magnets. Most of its supply comes from foreign sources, with China dominating the global supply chain.
Image source: Getty Images.
This supply chain weakness is exactly what USA Rare Earth (NASDAQ: USAR) is trying to solve. In a nutshell, it wants to build a domestic mine-to-magnet business to help the U.S. wrest itself from dependence on foreign exports.
It's a compelling investment thesis. But could a $5,000 investment in USA Rare Earth today actually make you a millionaire?
USA Rare Earth: The bull case
USA Rare Earth owns the Round Top deposit in Texas, a mountain full of rare-earth metals. Round Top contains the heavy rare-earth materials needed to produce permanent magnets, including dysprosium and terbium, which help magnets stay strong at high temperatures. It also contains neodymium and praseodymium, two essential ingredients in permanent magnets.
Round Top isn't operational today (management is targeting late 2028), but USA Rare Earth hasn't let that stop it. Most recently, it acquired Serra Verde, which owns the Pela Ema mine in Brazil. Unlike Round Top, Serra Verda is operational; indeed, the company describes it as one of the only scaled producers outside Asia capable of producing the four magnetic rare-earth materials listed above: neodymium, praseodymium, dysprosium, and terbium.
With Serra Verde now in the fold, USA Rare Earth's revenue is expected to explode. Analysts project revenue to jump from roughly $74 million this year to more than $700 million next year, then climb to nearly $1.6 billion the following year.
USAR Revenue Estimates for Current Fiscal Year data by YCharts
Could USA Rare Earth help make you a millionaire?
USA Rare Earth has a market capitalization of roughly $3.4 billion today. For this stock to make you a millionaire, it would need to grow 200 times. That would grow it to about $670 billion, making it one of the largest -- if not the largest -- mining companies in the world.
For perspective, the largest mining company in the world today -- BHP Group (NYSE: BHP) -- is worth about $219 billion. In other words, USA Rare Earth would need to grow to more than three times the size of the world's largest mining company today to turn a $5,000 investment into $1 million. I'm not saying it's impossible, but it's very, very unlikely.
So, no, I wouldn't expect a $5,000 investment in USA Rare Earth to make investors millionaires. Indeed, I would approach this growth stock cautiously, as the capital-intensive nature of mining will still make turning rapid revenue into profits very difficult.
Aggressive investors might want to speculate with a small position. But if you'd rather not pin your fortune to one company, a rare-earth exchange-traded fund (ETF) may be the better route.
Steven Porrello has no position in any of the stocks mentioned. The Motley Fool recommends BHP Group. The Motley Fool has a disclosure policy.