Forget AI Stocks: This Materials Play Is Vital to the Tech Industry

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In the artificial intelligence (AI) investment bonanza of 2025, several industries that support AI but are not directly involved in the software or even in the hardware side of the business got ignored.

Rare earth minerals is one such industry. Rare earths are a group of 17 minerals that have become vital to modern technology. Advanced alloys, batteries, ceramics, lasers, magnets, and many other critical components can only be made with rare earth minerals.

Many advanced weapons systems rely on rare earths, and China produces the vast majority of them. In fact, China produces more rare earths annually than the next nine top producers (including the U.S.) combined.

I'm sure you can see why the U.S. military considers that a problem.

Fortunately, the government is solving this by investing heavily in American rare earth mineral production. In fact, just this month, a bipartisan group in Congress proposed a new $2.5 billion agency, with the goal of boosting American rare earth production.

The United States does have reserves of rare earth minerals, and companies like USA Rare Earth (NASDAQ: USAR) are working to extract them.

Oklahoma!

Founded in 2019 and based in Stillwater, Oklahoma, USA Rare Earth is a relative newcomer to the American rare earth industry and only had its initial public offering (IPO) in March 2025. However, it has enormous potential to reshape that industry.

The company's Round Top rare earth mineral deposit in western Texas holds 15 of the 17 rare earth elements and other useful materials that aren't rare earth like lithium. The company is working to build a mine at the deposit and doesn't yet generate any revenue.

However, it does hope to begin generating revenue from its magnet manufacturing plant in Stillwater. USA Rare Earth aims to bring the factory online in the first half of 2026. Once it reaches full capacity, the plant will be able to produce about 5,000 metric tons of magnets.

Rare earth magnets are one of the most in-demand uses for the minerals and are required by defense contractors, electric vehicle (EV) manufacturers, and robotics companies, and for use in computers and semiconductors.

A speculative investment with demand behind it

Now, because this is a young company that doesn't yet generate any revenue, USA Rare Earth is almost by definition a speculative investment. However, it does presently hold $257.6 million in cash to just $1.3 million in debt. No doubt it will use much of that money in bringing its factory and mines online, but the return on its investment should make up for it.

Grand View Research put the rare earth market size at $3.95 billion in 2024 and has projected it to hit $6.28 billion by the end of the decade which represents a compound annual growth rate (CAGR) of 8.6%.

While the industry is set to grow and create an opportunity for USA Rare Earth, keep in mind that the company generates no revenue and has no track record of successfully building, scaling, and operating a mine. That is a big risk, but one that the U.S. government has stepped in to alleviate somewhat.

Back in 2025, the Department of Defense/Department of War invested $400 million into MP Materials (NYSE: MP), another American-based rare earths company, and established a price floor of $110 per kilogram for its neodymium and praseodymium (NdPr) magnets.

And the Department of Commerce has now signed a non-binding letter of intent to do the same with USA Rare Earth which caused its shares to leap 14% on January 26. Under the 2022 CHIPS and Science Act, the Department of Commerce proposed giving USA Rare Earth $277 million in federal funding and a $1.3 billion senior secured loan. The company also secured a common stock private investment in public equity (PIPE) to the tune of $1.5 billion, anchored by Inflection Point. The deal also lights a fire under USA Rare Earth and requires them to ramp up their business quickly to the point where the Round Top deposit (projected to begin operation in 2028) is extracting 40,000 metric tons of rare earth and critical mineral feedstock daily.

Before the government investment, USA Rare Earths was shaping up to be a promising if risky new addition to this vital industry. After the government investment, should the letter of intent be followed through on, that risk is still present but lowered. And if all goes according to the Department of Commerce and USA Rare Earth's plans, then I think it's worth a look.

James Hires has no position in any of the stocks mentioned. The Motley Fool recommends MP Materials. The Motley Fool has a disclosure policy.