Although it's been a challenging year for new and tenured investors, Wall Street has historically remained optimistic about the equity markets. This is particularly visible in the price targets Wall Street analysts and pundits assign for publicly traded companies.
For example, the vast majority of the innovation-driven companies that comprise the Nasdaq 100 -- an index of the 100 largest nonfinancial companies listed on the Nasdaq exchange -- have a higher average price target set by Wall Street analysts and pundits than their current share price. In the eyes of Wall Street, most of these established businesses are expected to grow over time.
But that's not always the case. Even though prognostications of significant downside are rare, they do happen. There are currently two Nasdaq 100 stocks that could plunge as much as 88% based on the low-water price targets issued by Wall Street.
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Tesla: Implied downside of 88%
The biggest jaw-dropper might be that one of the top-performing stocks over the past decade, electric vehicle (EV) manufacturer Tesla (TSLA -0.59%), is forecast by one analyst to have the most downside potential of any Nasdaq 100 stock.
According to Gordon Johnson of GLJ Research, Tesla is headed to $24.33 per share. Johnson issued a $73 price target in July, but this was prior to Tesla enacting a 3-for-1 stock split in August.
Keeping in mind that Johnson is a longtime Tesla bear, his skepticism is based on the idea that Tesla won't be able to meet production expansion goals. Additionally, Johnson has previously questioned Tesla's accounting practices. Due to the lumpiness of stock-based compensation for CEO Elon Musk, Johnson believes that the real expenses Tesla is contending with aren't being accurately portrayed in its quarterly filings.
To be clear, Tesla has clearly impressed Wall Street in a variety of ways; otherwise, it wouldn't have a $622 billion market cap. It's the first automaker in over five decades to have built itself from the ground up to mass production. Based on the nearly 344,000 EVs delivered during the third quarter, Tesla should easily top 1 million deliveries in 2022 for the first time in its history.
Investors are also excited about the innovation Musk brings to the table. Since taking the helm, Musk has diversified his company's operations by acquiring Solar City and providing energy-storage solutions. He's also currently overseeing the ongoing production of four EV models (Models 3, S, X, and Y), has promised the coming production of the Semi and Cybertruck, and is overseeing the development of Tesla Bot, a robotic humanoid designed to handle a variety of tasks.
But I do believe Johnson is certainly right to be skeptical of Tesla's gargantuan valuation. In particular, the biggest issue for Tesla is that its CEO, Elon Musk, is a legal and operating liability. Despite teasing multiple new technologies and innovations, Musk has a poor history of meeting the time frames when said innovations would make their debut. Examples include the Level 5 full self-driving vehicle, which has perpetually been "a year away" since 2014, and the Semi and Cybertruck, which have both had their production dates pushed back. Tesla's valuation is built on these promises, and in many instances, Musk's promises fail to materialize.
Tesla also operates in an industry that sells a cyclical, commoditized product. Whereas most auto stocks have high single-digit forward price-to-earnings ratios, Tesla is valued at 35 times forward-year earnings. Tesla is exposed to the same headwinds as traditional automakers, and its energy business continues to lose the company money.
Although $24.33 per share might be too bearish for a company that's hit recurring profitability, Tesla's nearly $200 share price makes little sense given its mounting red flags.
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Moderna: Implied downside of 38%
The other Nasdaq 100 stock that at least one Wall Street analyst believes will plunge is biotech stock Moderna (MRNA 1.36%).
In the eyes of Mani Foroohar at SVB Leerink, Moderna is worth $101 per share. That's 38% below where Moderna ended the day on Nov. 7, 2022. Interestingly, though, this $101 price target is up notably from SVB's previous target of $74 for the company.
Foroohar's increased price target is based on the expectation that Moderna will benefit from higher COVID-19 vaccination prices next year when the distribution of Spikevax shifts to the private market. The SVB analyst believes this will boost sales for the company in 2023 and help it achieve revenue targets.
In one respect, the global market for COVID-19 vaccines remains an opportunity. Initial inoculations and booster shots are still needed in developed countries and emerging markets. Even though the worst of the pandemic appears to have passed, the recurring-revenue opportunity for Moderna remains firmly in place.
To build on this point, Moderna is one of three COVID-19 vaccine developers to achieve a greater-than 90% vaccine efficacy (VE). While VE isn't everything when it comes to COVID-19 vaccines, it's a powerful headline number that makes Spikevax a popular choice among the vaccinated.
There's also an opportunity for Moderna to expand its existing product line by developing strain-specific COVID-19 vaccines and combination therapies, and for gaining approval for other targeted indications, such as respiratory syncytial virus (a phase 3 clinical readout should be available this winter) and influenza. To use a baseball analogy, the more pitches that are thrown, the more home run swings Moderna can take.
But there is another side to this story. Although Moderna is inexpensive and cash-rich, it is, ultimately, entirely dependent on its COVID-19 vaccines. That's a $62 billion company based on just a few vaccines from one area of focus. Even with an exceptionally high VE, competition within the COVID-19 vaccine arena has grown and should continue to do so since it represents a high-dollar recurring-sales opportunity. In other words, Moderna's revenue stream is considerably riskier than you'd expect to find for a drug developer with a $62 billion market cap.
Furthermore, advanced purchase agreements will fall off in 2023 as the company shifts to the private market distributors. Whereas the company anticipates generating between $18 billion and $19 billion in net product sales this year, Wall Street collectively expects revenue to be more than halved in 2023. The company's exceptionally low price-to-earnings ratio could very easily surpass 40 (or more) in the upcoming year.
Until Moderna sufficiently differentiates its product line beyond COVID-19, questions surrounding its valuation should persist. That's more than enough reason to believe that Foroohar's price target of $101 could become an eventual reality.
