Collectively speaking, Wall Street analysts and financial institutions are optimistic about the stock market as a whole. Even though economic recessions, stock market corrections, and bear markets are inevitable events, analysts are well aware that, over long periods, the major U.S. indexes increase in value over time.
The same thesis applies to most high-quality and widely held companies. The key word here being "most."
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Though the vast majority of Wall Street analysts have ratings of buy or hold on the universe of companies they cover, the rare sell or underperform rating does exist -- even for widely held stocks. If select Wall Street analysts are right, three of the most popular stocks on the planet could tumble between 44% and 57% over the next year.
Tesla: Implied downside of 57%
The first ultra-popular stock that could plummet over the coming year, at least according to analyst Craig Irwin of Roth Capital, is electric vehicle (EV) manufacturer Tesla (TSLA 4.96%). Even after slightly adjusting his firm's price target upward last week, Irwin foresees Tesla shares hitting $85. That represents a 57% decline from where shares closed last week.
Irwin's pessimistic tone on Tesla has to do with the company's nosebleed valuation. In an interview with CNBC this past August, Irwin opined that other automakers can ramp production of EVs and effectively replicate the success Tesla has demonstrated... but with a far more attractive valuation.
For the time being, Tesla is the clear leader in North American EV sales. After delivering 343,830 EVs during the third quarter, the company appears well on its way to surpassing 1 million deliveries in a year for the first time in its history. With the Austin, Texas, and Berlin, Germany, gigafactories coming online earlier this year, there's a good likelihood of at least 50% production and delivery growth in 2023.
Tesla also has CEO Elon Musk, who's overseen Tesla's expansion into the energy business, as well as its push into robotics. Musk brings an intangible factor to the table that can be difficult for Wall Street analysts to value.
But there are clear concerns with Tesla that I share with Irwin. Even at a forward-year multiple of 35 times Wall Street's forecast earnings, this is numerous deviations above the single-digit price-to-earnings ratios virtually all auto stocks trade at. Tesla isn't immune to the supply chain challenges and historically high inflation currently weighing on the auto industry. Its energy operations have also consistently lost money.
The other issue with Tesla is its polarizing CEO. Although he's a visionary, Musk has failed to deliver on a long list of promises. In particular, Musk's timeline for when new EVs or innovations will be introduced, such as level 5 self-driving, the Cybertruck, and the Semi, to name a few, haven't been met. Tesla's valuation has been supported by these as of now empty promises. In other words, an $85 share price target isn't entirely out of the question, in my view.
Bed Bath & Beyond: Implied downside of 49%
A second extremely popular stock that at least one Wall Street analyst believes will leave shareholders disappointed is home furnishings retailer Bed Bath & Beyond (BBBY).
According to Goldman Sachs analyst Kate McShane, Bed Bath & Beyond is headed to just $2 per share over the next 12 months. That would be a hefty 49% drop from where shares closed last week. The impetus behind McShane's diminutive price target is Bed Bath & Beyond's weak second-quarter comparable-store sales and ongoing inventory problems.
At the beginning of 2020, even I had my hopes up that Bed Bath & Beyond would take a page out of the Best Buy turnaround blueprint and right the ship. On the surface, the company's plan made sense. It would aggressively invest in direct-to-consumer sales, put money to work to improve the efficiency of its supply chain, and seek out products or brands that would help differentiate its stores and drive buying activity. Unfortunately, the COVID-19 pandemic and the company's balance sheet did it no favors.
One of the biggest problems for Bed Bath & Beyond is that its products aren't differentiated. Consumers have simply chosen to shop online elsewhere. Considering that comparable-store sales declined 26% (not a typo!) in the fiscal second quarter, it's clear the company hasn't done enough to court consumers or get the right product in its stores.
But the bigger gaffe might be Bed Bath & Beyond's share purchase program, which in hindsight wasted more than $1 billion in cash that it could desperately use right now. According to the bond market, Bed Bath & Beyond's $900 million bond set to mature in 2044 is trading almost 92% below its par issue price in 2014. That's often a good indication that bond investors believe Bed Bath & Beyond will struggle to stay solvent.
Ultimately, McShane's price target may prove to be $2 too high, but only time will tell.
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Netflix: Implied downside of 44%
The third exceptionally popular stock that at least one Wall Street analyst is not too fond of at its current valuation is streaming giant Netflix (NFLX 1.74%).
In mid-October, following the release of the company's third-quarter operating results, Benchmark Company analyst Matthew Harrigan raised his firm's price target on the company by $5. Only problem is the new target of $162 (along with his firm's sell rating) sits 44% below where Netflix closed this past week. In an interview with CNBC in July, Harrigan noted that Netflix's moderating subscriber growth, increased competition, and low-to-mid-single-digit free cash flow yield were all reasons to be cautious.
On the one hand, Netflix has rightly commanded a premium for more than a decade thanks to its industry-leading streaming market share. During the first quarter of 2022, Netflix held a 39% share of monthly active streaming video on-demand users in the U.S., according to Sensor Tower. This success is a function of its first-mover advantage, as well as its focus on original programming. It's estimated that half of Netflix's current U.S. content library is comprised of original content.
Additionally, Netflix has always demonstrated strong pricing power and innovation. The company hasn't dealt with subscriber pushback following previously announced monthly price increases, and it recently introduced an ad-supported tier to attract users wanting a lower monthly price point.
But to echo what Harrigan said over the summer, Netflix's market share is, indeed, declining as competition builds, and the company's cash flow has always been a concern. Until recently, Netflix had been spending aggressively and burning cash to expand its reach into international markets. Even though Netflix is reasonably inexpensive on an earnings basis, it's still an incredibly pricey stock relative to what Wall Street believes it'll generate in cash flow in 2022 and 2023.
While betting against Netflix has rarely paid off over any significant length of time, it's difficult to see a scenario where its stock outperforms as competition picks up and subscriber growth slows.
