Wall Street and investors have been given a not-so-subtle reminder since the beginning of the year that stock market corrections, and even crashes, are a normal part of the investing cycle. Both the benchmark S&P 500 and growth-dependent Nasdaq Composite are enduring their steepest pullbacks since the coronavirus crash nearly two years ago.
But for a handful of ultra-popular stocks, the pain could just be getting started. According to a select group of Wall Street analysts and investment banks, the following trio of widely held companies could plunge by as much as 65%.
Image source: Getty Images.
Moderna: Implied downside of 41%
Throughout much of 2021, analyst Mani Foroohar of SVB Leerink maintained an underperform rating on biotech stock Moderna (MRNA 12.68%) and held firm to a price target of $85. It wasn't until the fourth quarter that Foroohar relented and increased his firm's price target by... one dollar... to $86. All the while, Moderna's shares nearly hit $500 in August.
Yet, Foroohar's prognostication is beginning to look more prescient than ever. Moderna has declined by more than 70% since hitting its intra-day peak, and it now sits only a 41% decline away from hitting SVB Leerink's price target.
Moderna became something of a household name during the pandemic. The company's coronavirus disease 2019 (COVID-19) vaccine, mRNA-1273, is still one of only three COVID-19 vaccines to have hit or surpassed a vaccine efficacy of 90% in clinical trials. This allowed Moderna and Pfizer/BioNTech to gobble up the proverbial low-hanging fruit when it came to COVID-19 inoculations in developed markets.
The company is also benefiting from the mutability of the SARS-CoV-2 virus. While new variants of COVID-19 are bad news for the world, they're great for Moderna. Every new variant provides Moderna with an opportunity to offer initial inoculations and booster shots, as well as develop combination vaccines (like influenza and COVID-19) or variant-specific vaccines. In other words, it's the company's ticket to recurring revenue.
Then again, Moderna's only revenue-producing treatment is mRNA-1273. Even though COVID-19 is a big-dollar opportunity, Moderna was once valued at close to a $200 billion market cap despite having only one product on pharmacy shelves. Even now, with the company's market cap at $59 billion, Moderna remains risky given that COVID-19 vaccine and oral therapy competition is picking up.
It could be years before Moderna is generating revenue from other channels, making it a higher-risk investment.
Image source: American Airlines.
American Airlines Group: Implied downside of 33%
Another ultra-popular stock that Wall Street believes will plummet is American Airlines Group (AAL 2.06%).
While a sizable number of analysts are expecting American Airlines' stock to maintain altitude, Joseph DeNardi of Stifel Nicolaus has just a $12 price target on the company. If DeNardi's target were to come to fruition, shares would lose a third of their value, as of this past weekend.
American Airlines optimists frequently point to the company as a clear-cut turnaround play. Assuming air travel returns to some semblance of normal, American would be valued at a mid-to-high single-digit price-to-earnings ratio.
Aside from being viewed as a deep-discount value play by bullish investors, American Airlines also happens to be one of the most consistently short-sold stocks. As of the end of January, just shy of 100 million shares were held short, relative to a float of 641.6 million shares. If the company is able to successfully navigate these challenging times, there's hope for a short squeeze.
But unlike Moderna, which is rolling in profits and should enjoy at least some degree of recurring revenue and positive operating cash flow, the airline industry has shown time and again that it can't deal with sustained economic shocks. This is especially true of American Airlines.
Even with a return to profitability forecast by Wall Street in 2023, American Airlines' future is as precarious as ever. While the company ended 2021 with record liquidity, it's also lugging around more than $46 billion in various forms of debt and operating lease liabilities. This means the company's interest expenses have soared.
The company's beleaguered balance sheet, coupled with an expected jump in fuel costs, makes it a stock that investors should avoid.
From left to right: A Tesla Model S, Model 3, Model X, and Model Y parked at a Supercharger station. Image source: Tesla.
Tesla Motors: Implied downside of 65%
However, the disaster du jour might just be electric vehicle (EV) kingpin Tesla Motors (TSLA 0.01%).
Analyst Toni Sacconaghi of Bernstein has held an underperform rating and $300 price target on Tesla for many months. With shares closing last week at nearly $857, it implies downside of 65% and a projected loss of almost $576 billion in market value. As a reminder, Tesla was a $1 trillion company as recently as a few weeks ago.
The bull case for Tesla predominantly revolves around its first-mover advantages. The company began 2021 with ambitions of delivering 750,000 EVs, but ultimately ended the year with over 936,000 deliveries. With two new gigafactories set to come online this year in Austin, Texas and Germany, Tesla has a real shot to sustain year-over-year production growth of 50% in the near term.
The company has also overcome capital concerns and profitability questions. It ended last year with $17.6 billion in cash and cash equivalents, and most importantly generated significant net income in three of the last four quarters, without regulatory credits accounting for the lion's share of that income.
But there's a lot to not like as well. For example, EV competition is picking up in a big way globally. Though Tesla may have advantages with its battery capacity, power, and range at the moment, it's uncertain how much longer these advantages will persist. Most automakers are rich in history and have the infrastructure necessary to ramp up EV production.
Tesla and its CEO Elon Musk also have a habit of overpromising and under-delivering. For instance, Musk initially expected to roll out the Cybertruck in 2021. Its initial launch date has since been pushed back till 2023. Likewise, full self-driving hasn't reached the level of autonomy that Musk has promised for years. In other words, Tesla's visionary CEO can be a liability at times, too.
With a nosebleed valuation in an industry known for its single-digit price-to-earnings multiples, Tesla still has a lot to prove.
