Over the long run, Wall Street is a proven wealth creator.
According to data compiled by Crestmont Research, if an investor were to have, hypothetically, purchased an S&P 500 tracking index at any point since the beginning of 1900 and held that position for 20 years, they would have generated a positive total return, including dividends paid, without fail. It's why most Wall Street analysts take a generally optimistic view when setting price targets on shares of the companies they follow.
But just because the major stock market indexes tend to increase in value over time, it doesn't mean all stocks are going to be winners. According to the price targets set by a select few Wall Street analysts, three of the most-popular and widely held stocks could see anywhere from 88% to 100% of their value wiped away in the not-too-distant future.
Two Rivian R1Ts climbing a hillside. Image source: Rivian Automotive.
Rivian Automotive: Implied downside of 100%
The first ultra-popular stock that at least one Wall Street analyst foresees considerable downside to is electric-vehicle (EV) manufacturer Rivian Automotive (RIVN 6.10%). CEO David Trainer of investment research firm New Constructs believes shares of Rivian will eventually head to $0. In other words, Trainer believes a Chapter 11 reorganization is in the company's future, which would wipe out common equity shareholders.
Rivian zoomed onto the EV scene as arguably the hottest initial public offering of 2021. With most developed countries adamant about reducing their carbon footprints, the push to consumer and enterprise EVs is a multi-decade growth opportunity for the taking.
The most intriguing aspects of Rivian include its massive existing order with e-commerce behemoth Amazon (AMZN 3.43%), as well as the niche at least one of its EVs is targeting.
To tackle the former, Rivian secured an order in September 2019 from Amazon for 100,000 electric delivery vans (EDVs), which is expected to be fulfilled by 2030. Even though Amazon generates copious amounts of operating cash flow, it wouldn't be tossing around this kind of money if it didn't believe that Rivian's EDV was a legitimate clean-energy solution for its ever-growing logistics network. This deal should provide Rivian with relatively steady cash flow, assuming it can ramp up its production.
In terms of its EVs, Rivian's R1T pickup is what really stands out. Although legacy automakers like General Motors and Ford Motor Company are taking orders and producing heavy-duty EV pickups of their own, the R1T is the only true luxury pickup EV that can still go off-roading. Operating in this niche could insulate Rivian from competition and give the R1T room to run.
But Trainer is most certainly correct in his view that cash will be a concern. Through the first nine months of 2022, Rivian burned through nearly $4.9 billion in cash and cash equivalents. Although it had close to $13.3 billion in cash and cash equivalents as of Sept. 30, 2022, the company is outlaying $5 billion to construct a manufacturing plant in Georgia, which won't be producing until sometime next year.
Furthermore, it's losing a significant amount of money as it contends with ongoing supply chain issues, and may see demand falter if the U.S. economy falls into a recession. Even with Amazon as a tailwind, Rivian's long-term outlook remains uncertain.
Bed Bath & Beyond: Implied downside of 89%
A second ultra-popular stock that at least one Wall Street analyst expects to plunge is home furnishings retailer Bed Bath & Beyond (BBBY).
According to analyst Seth Basham of Wedbush Securities, this widely owned meme stock is headed to just $0.25 per share, which would represent downside potential of 89% from where it closed last week. Believe it or not, this $0.25/share price target is actually up from Basham's prior price target of $0 on Bed Bath & Beyond.
Once upon a time, Bed Bath & Beyond was a profitable retail chain that consistently repurchased its own stock. For businesses with steady or growing net income, share buybacks can increase earnings per share and make a stock more fundamentally attractive.
However, the company's growth heyday has long since passed. Despite store closures and other cost-cutting efforts, Bed Bath & Beyond hasn't come close to profitability in years. The company's products simply aren't differentiated enough to drive traffic into its stores. What's more, online retailers have been able to undercut Bed Bath & Beyond's price points, thereby siphoning away customers at a steady pace.
Last week, the company was able to (at least temporarily) avert a seemingly imminent bankruptcy filing thanks to a capital raise that provided $225 million up front and may yield an additional $800 million over time. Unfortunately for existing shareholders, the preferred stock and warrants offered by the company to raise capital will very likely be converted to common stock. It's possible that Bed Bath & Beyond's outstanding share count grows nearly eightfold.
But the biggest warning of all can be seen in the company's bonds. The notes set to mature in 2024, 2034, and 2044 are, respectively, trading at $0.28, $0.12, and $0.16 on the dollar. Bonds trading this far below original face value indicate a highly distressed business that may not remain solvent for much longer.
The Model 3 is Tesla's flagship sedan. Image source: Tesla.
Tesla: Implied downside of 88%
The third ultra-popular stock that has the potential to plunge is EV kingpin Tesla (TSLA -1.11%). Longtime Tesla bear Gordon Johnson of GLJ Research foresees the largest automaker by market cap plunging to $24.33 per share, which would imply 88% downside from where it ended last week. Johnson's price target of $73 was issued prior to Tesla conducting a 3-for-1 stock split last year; thus the oddly specific target of $24.33.
Tesla has obviously done some things right; otherwise it wouldn't be sporting a $623 billion market cap. For instance, it's North America's leading EV producer. With production activity expected to ramp up at the Austin, Texas, and Berlin, Germany, gigafactories in 2023, Tesla will be looking to boost global output to at least 1.8 million EVs from roughly 1.37 million last year.
Additionally, Tesla has been profitable on a generally accepted accounting principles (GAAP) basis in each of the past three years. That's in stark contrast to legacy automakers, whose EV divisions are losing money hand over fist.
But there are also a number of red flags that suggest Tesla could head significantly lower in 2023 (and beyond).
As an example, Tesla recently reduced the price of its flagship Model 3 sedan and popular Model Y SUV by up to 20% in the U.S. and China. If demand were strong for these vehicles, there's no way Tesla would be cutting prices this aggressively. What these cuts demonstrate is that either competition is growing, or demand is waning and inventory levels are rising.
Another clear problem for Tesla is that, when you dig into its nuts and bolts, it really is just a car company. Last year, $10 billion of the company's $81.5 billion in total sales derived from energy generation, storage, and services, on a combined basis. However, these segments contributed just $499 million of the company's $20.9 billion in gross profit. Tesla is entirely dependent on its gross vehicle margin from selling EVs -- and that's at risk with the company reducing its prices.
Lastly, CEO Elon Musk is a plain-as-day liability for the company. He's drawn the attention of securities regulators on more than one occasion, and constantly promises new innovations and EVs on timelines that are virtually never met. Tesla's valuation has been inflated by these promises, and this valuation could just as easily deflate if these promises continue to go unfulfilled.
