For more than 15 months, investors have enjoyed a historic bounce-back rally from the coronavirus crash. Through the previous weekend, the widely followed S&P 500 had gained 95% since hitting its lows on March 23, 2020.
While investors are rightly excited about the prospects for a number of innovative companies, three ultra-popular stocks stand out as particularly polarizing. More specifically, the lowest price target among Wall Street analysts for each of the following companies implies a minimum decline of 90% over the next 12 months.
AMC Entertainment: Implied decline of 98%
Perhaps it's no surprise that one of the most polarizing stocks, at least from a price target perspective, is a meme stock. Movie theater chain AMC Entertainment (AMC 7.56%), which is a favorite among retail investors on Reddit, currently has a $1 12-month price target from Eric Handler at MKM Partners. Handler actually downgraded the company from neutral to sell at the beginning of February, which would now imply peak downside of 98% over the next year.
Although a $1 price target over the next 12 months might be a bit extreme, even for a pronounced AMC bear like myself, there are certainly more than enough reasons to support Wall Street's pessimistic tone toward AMC.
The company's retail investors, collectively referred to as "apes," despise when concrete fundamental data is brought into the discussion, because they don't believe their trade has anything to do with fundamentals. However, fundamentals always matter. Operating performance is what ultimately drives a company -- not buyers and short-sellers -- and it'll determine whether AMC can save itself or not.
A quick look at movie theater industry trends and the company's operating performance will give you a good idea why most analysts foresee a 90% decline in AMC's share price. Movie theater ticket sales have been in a fairly steady 19-year decline, and AMC has been burning cash at an incredible pace. With the company's 2027 bonds still valued nowhere near par, the only inference to make is that bondholders aren't convinced the company will survive over the long run.
The other factor likely influencing Wall Street's ultra-low price targets for AMC is the emotionally driven misinformation campaign that's artificially inflated this stock. An abundance of incorrect assertions on message boards and YouTube about hedge funds and short-selling have created an unsustainable rally.
I'm not quite sure MKM Partners sees its price target hit, but I fully expect this pump-and-dump scheme to end poorly sooner than later.
GameStop: Implied decline of 95%
Another ultra-popular meme stock that's expected to fall off a cliff, at least according to one Wall Street analyst, is video game and accessories retailer GameStop (GME -2.67%). GameStop ended the previous holiday weekend at almost $203 a share. Yet, according to BofA Securities analyst Curtis Nagle, GameStop is a $10 stock. This would imply a decline of up to 95% over the next year, if it came to fruition.
Like AMC, GameStop has taken the opportunity to sell stock in order to raise capital. But unlike its meme sidekick, GameStop was working with a considerably cleaner balance sheet from the start. Following multiple capital raises, GameStop is debt-free, and it has more than enough cash to fund its multiyear digital gaming transformation. In other words, whereas AMC's long-term survival remains very much undetermined, GameStop looks to have secured its survival with capital raises.
The issue for GameStop, and why Wall Street isn't buying into the Reddit craze, is that it's a long way from turning around a business that's been reliant on brick-and-mortar retail locations for more than two decades. The company's previous management team failed to foresee the shift to digital gaming, which has hurt its previously high-margin used-game sales and forced the company to close stores in order to reduce its expenses.
On the plus side, e-commerce sales nearly tripled last year. But net sales tumbled 21.5% in fiscal 2020, with the company's store count declining by 12% and comparable-store sales falling 9.5%. Focusing on store closures and pushing digital gaming will take years for GameStop to get back in the black, and Wall Street knows it.
Believe it or not, I think Nagle's price target is too pessimistic. While I don't believe GameStop is worth anywhere close to $200, the company's healthy balance sheet provides enough wiggle room for its new management team to execute on its digital transformation. It remains a stock to avoid in my book, but it's nowhere near as dangerous as AMC.
Tesla Motors: Implied decline of 90%
The final ultra-popular and polarizing stock on the list isn't a meme stock. Rather, it's electric-vehicle (EV) kingpin Tesla Motors (TSLA -2.62%), which also happens to be the most-held stock on retail investor-friendly online brokerage Robinhood.
Despite it ending the previous week at almost $679 a share, the CEO of GLJ Research, Gordon Johnson, has placed just a $67 price target on the EV giant. According to Johnson, demand issues for Tesla, which are evidenced by more than a dozen price cuts in 2021, and its contracting automotive gross margin, are reasons to hit the brakes on investors' auto darling.
On one hand, Tesla is doing something we haven't seen successfully accomplished in more than five decades. CEO Elon Musk has built a car company from the ground up to mass production. Based on the company's total deliveries of 201,250 in the second quarter, it looks to be on pace to deliver 750,000 to 800,000 vehicles this year. Tesla's battery technology is also currently superior to its competition.
On the other hand, expecting Tesla to maintain this advantage when auto companies are spending tens of billions on EVs and autonomous technology is wishful thinking, at best. Ford and General Motors will each be launching 30 new EV models worldwide by 2025.
Arguably the bigger issue is that a nearly $650 billion company should be able to generate a profit from the product it sells. Tesla has only been able to get in the profit column by selling renewable energy credits to other automakers, or by selling its digital assets (i.e., Bitcoin) for a profit. Remove these one-time benefits, and Tesla is still losing money on EV sales and facing an increasingly crowded auto landscape.
Though $67 seems unlikely over the next year, I do share Johnson's skepticism about Tesla.