For more than a century, the stock market has been a wealth-building machine. The average annual return of the major U.S. indexes has handily surpassed the average returns of other asset classes, such as bonds and commodities, over the long run.
But just because the aggregate value of equities rises over time, it doesn't mean all stocks are going to be winners. Even though Wall Street analysts and investment banks are best-known for cheering on innovation, there are instances where they expect well-known stocks to head lower.
Based on the lowest published price target from Wall Street, the following three stocks are expected to plunge between 42% and 92% in 2022.
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Tesla Motors: Implied decline of 92%
It likely comes as no surprise that electric vehicle (EV) kingpin Tesla Motors (TSLA 0.36%) is a highly polarizing stock among Wall Street analysts. While some believe the company could nearly double in value from the $829 a share it closed at on Jan. 27, Gordon Johnson at GLJ Research foresees Tesla falling more than 90%, based on his price target of $67 for the company.
To be fair, Tesla has done a lot of things right. CEO Elon Musk built the company from the ground-up to mass production. Tesla is the first automaker in more than five decades to successfully enter the auto market and reach mass production.
Tesla has also had no issues with consumer demand, as evidenced by its production ramp and deliveries. When 2021 began, Tesla was expected to be in the neighborhood of 750,000 EV deliveries for the year. But when the curtain closed, the world's most valuable automaker had delivered more than 936,000 EVs. With the gigafactory in Austin, Texas, set to open soon, Tesla will have plenty of opportunity to increase production to meet growing consumer EV demand.
But there are plenty of reasons to be skeptical of Tesla and its $833 billion valuation. For example, even though Elon Musk's innovation has been a driving force behind his company's success, he's also been something of a liability. Musk's social media presence has previously got him in trouble with regulators, and his forecasted timeline for new product rollouts is almost always far too ambitious. Most new vehicles roll off the assembly line later than expected. Additionally, the company's full self-driving (FSD) software remains something of a work in progress, despite Musk touting FSD's potential for more than five years.
Another clear issue is Tesla's valuation. Auto stocks are traditionally valued at single-digit price-to-earnings (P/E) ratios to reflect their generally high debt levels and the cyclical nature of the auto industry. Tesla has consistently sported a forward-year P/E ratio in the triple digits.
With other major automakers spending tens of billions of dollars on EV and battery research, it's likely that Tesla's competitive edge will shrink over time, as well. While a $67 price target is probably too bearish given Tesla's current competitive advantages, I do believe downside is warranted.
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Moderna: Implied decline of 42%
A second extremely popular stock one Wall Street investment bank believes will plunge in 2022 is biotech stock Moderna (MRNA 0.33%). According to analyst Mani Foroohar of SVB Leerink, Moderna is on track to hit $86 this year, which implies downside of 42% in the company's shares.
Most people are probably familiar with Moderna given the role it's played in combatting the coronavirus disease 2019 (COVID-19). The company's vaccine, mRNA-1273, produced a 94.1% vaccine efficacy (VE) in U.S. clinical trials, which were reported in November 2020. To date, it's one of only three vaccines to have generated a VE of 90% or higher. Although VE isn't the only measure of success for COVID-19 vaccines, it's the headline figure a lot of people are using when deciding which vaccines or booster shot to receive.
To add, the mutability of the SARS-CoV-2 virus that causes COVID-19 is a potential positive for Moderna. While we'd prefer to see COVID-19 go away completely or mutate into less-severe forms, new variants of the disease provide Moderna with recurring revenue opportunities, either with booster shots or variant-specific vaccines.
However, competition among COVID-19 treatments is only growing. Aside from COVID-19-specific vaccines still in development, competitors are working on influenza/COVID-19 combination vaccines that could prove more appealing. Also, oral treatments are in the works for a handful of companies. This all brings into question how long Moderna can hang onto its share of COVID-19 treatment revenue.
What's more, Moderna's only source of recurring revenue is mRNA-1273. Even with shares of the company retracing 70% from an all-time high, investors are still paying $60 billion for a company that has only one therapy generating sales. In my view, it makes Moderna a risky bet, even after its significant pullback.
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Transocean: Implied decline of 69%
A third popular stock with the potential to plunge in 2022 is offshore oil-drilling company Transocean (RIG 0.49%). Despite its shares falling 98% since peaking in 2007, one Wall Street investment bank foresees Transocean hitting $1 per share this year, implying further downside of 69% from where it closed on Jan. 27.
If there is good news for the company, it's that oil prices are soaring. West Texas Intermediate crude and Brent crude recently surpassed $87/barrel and $90/barrel, respectively. Although deepwater drilling, which is what Transocean specializes in, can be quite costly, the highest price for crude since 2014 offer more than enough incentive for exploration and production (E&P) companies to contract with Transocean at these prices.
The company's backlog also appears to suggest that E&P companies are comfortable with crude oil prices for the foreseeable future. Transocean ended 2021 with a $7.1 billion contract backlog, which equates to almost three years' worth of revenue.
However, the big concern for Transocean is the company's balance sheet. At the end of September, it had $900 million in cash and cash equivalents and $7.3 billion in total debt. With the Federal Reserve set to begin raising lending rates, highly indebted companies like Transocean are getting put under the microscope by Wall Street.
Furthermore, Transocean's deepwater rig utilization rates aren't that impressive. Even with higher crude prices and contract dayrates improving, total fleet utilization was just 53% in the third quarter, which was down from 65% in Q3 2020. There's clearly concern from E&P companies about making new multiyear commitments with the pandemic still ongoing.
While I don't expect the most bearish outlook of a $1 price target to come to fruition, it's hard to see Transocean's shares gaining much traction without a significant debt reduction and/or vast improvement in rig utilization.
