When examined over short periods, Wall Street is anything but predictable. Over the trailing two years, we've watched all three major indexes climb to multiple new highs, subsequently plunge into a bear market, then rebound substantially in the first half of 2023.
The theme during the first half of the year was that many of Wall Street's high-growth, megacap companies are back in favor. While the competitive advantages these industry leaders offer is fueling significant upside in their share prices, not all Wall Street institutions or analysts are onboard.
Though Wall Street price targets are rarely set in stone and aren't an end-all when it comes to share-price performance, the following three high-flying stocks are expected to plunge by as much as 91% if a select few Wall Street analysts are correct.
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Tesla: Implied downside of 91%
The first supercharged growth stock at least one Wall Street analyst has mixed emotions about is electric-vehicle (EV) manufacturer Tesla (TSLA 3.91%).
Tesla's trailing-five-year gain of 1,050%, as well as its 108% year-to-date increase, likely isn't sitting well with GLJ Research founder and CEO Gordon Johnson. When accounting for Tesla's 3-for-1 stock split last August, Johnson's price target for the company is just $24.33 per share, or 91% below where it ended this past week.
Although Johnson has voiced a number of concerns with Tesla in the past, including its accounting practices, his biggest issue with the world's largest automaker by market cap is its rapidly growing inventory.
Since the year began, Tesla has undertaken a half-dozen price reductions in the United States. Although optimists had been suggesting that these price cuts reflected nothing more than improved operating efficiencies and the company's attempt to gobble up share from competitors, CEO Elon Musk confirmed during the company's annual shareholder meeting that Tesla's pricing strategy has everything to do with demand. Persistent price cuts and rising inventory are a worrisome combination that may lead to continued automotive margin erosion as competition picks up.
The other core concern for Tesla shareholders has to be Elon Musk. While no one denies that he has done some amazing things, he's also known for drawing the ire of securities regulators and constantly promising innovations that he either delays or scraps. Many of Musk's as-of-now unfulfilled promises have been baked into Tesla's share price.
The good news for investors is that Tesla remains profitable on the basis of generally accepted accounting principles (GAAP), which is something we're not seeing from the EV divisions of most new and legacy automakers. But with the company valued at 74 times consensus earnings per share (EPS) in 2023 in an industry that traditionally trades at a high-single-digit price-to-earnings (P/E) ratio, maintaining its current valuation may prove to be impossible.
Palantir Technologies: Implied downside of 64%
A second high-flying stock that has at least one Wall Street analyst sounding the alarm is data-mining specialist Palantir Technologies (PLTR 1.96%). Despite shares of Palantir gaining 119% on a year-to-date basis (through June 25), analyst Rishi Jaluria of RBC Capital Markets maintains a sell rating on the stock, with a price target of just $5. If Jaluria is correct, Palantir would be set to plunge 64%.
In a research note following the release of Palantir's first-quarter operating results, Jaluria points out that the company's performance was more or less in line with Wall Street. Further, he notes the growth rates for a number of key performance indicators are slowing, including remaining performance obligations, net revenue retention, and total deal value.
One of the more interesting takes from Jaluria is that Palantir isn't the artificial intelligence (AI) powerhouse it's being made out to be. Although Palantir is one of a few dozen stocks riding the AI wave, given the role its software is expected to play for governments and enterprises, Jaluria views the company as nothing more than a massive data-processing platform. In other words, Palantir's AI-associated bubble could deflate.
However, it's not all bad news for Palantir -- even if Jaluria sees it that way. The company recorded its first-ever GAAP profit during the March-ended quarter and registered strong customer growth across the board.
In particular, Palantir saw its global customer count jump 41% year over year and 50% in the United States. Keep in mind that Palantir's Foundry platform, which is geared toward businesses, didn't really become a major growth driver until the past two years or so. The company's runway to make big data more manageable for businesses is lengthy.
Additionally, Palantir is sitting on a substantial amount of capital: $2.9 billion in cash, cash equivalents, and short-term U.S. Treasuries. This provides a level of financial flexibility that most high-growth companies lack.
But when push comes to shove, Palantir could struggle to sustain a P/E ratio of 67, based on Wall Street's consensus adjusted EPS for this year. Although its profits are expected to grow incredibly fast over the coming five years, Palantir is commanding one heck of a premium for the time being.
Image source: Getty Images.
Nvidia: Implied downside of 54%
The third high-flying stock one Wall Street analyst believes could plunge is semiconductor solutions specialist and AI powerhouse Nvidia (NVDA 1.69%).
On a year-to-date basis, Nvidia is the top-performing stock in the S&P 500 (up 189% to north of $400 per share). But according to DZ Bank analyst Ingo Wermann, who rates Nvidia as a sell, shares are headed to just $195. If Wermann's prognostication is accurate, Nvidia could lose more than half of its value.
History and valuation are, arguably, Nvidia's biggest hurdles. Although Nvidia accounts for the lion's share of the AI-focused graphics processing units (GPUs) being used in data centers, next-big-thing investments have a tendency to disappoint.
Looking back at other game-changing trends, such as the internet, business-to-business commerce, genome decoding, 3D printing, and the metaverse, to name a few, we saw investor expectations for growth outstrip real-world demand every single time. This isn't to say that AI won't be a game changer, so much as to recognize that investor expectations with next-big-thing investments tend to outpace reality in the early going.
There's also Nvidia's outsized valuation. Even with growth expectations being upped dramatically following the company's fiscal first-quarter results, investors are paying a multiple of nearly 60 times forecast profits in the current fiscal year to buy shares of Nvidia. Compared to other market-leading megacap stocks, Nvidia's fundamental ratios, such as price-to-sales, show it's one of the priciest of the group.
But there are factors working in Nvidia's favor. As noted, the company's fiscal-second-quarter forecast completely blew Wall Street's expectations out of the water. CEO Jensen Huang detailed significant demand for AI data-center solutions; that's expected to push the company's Q2 sales to $11 billion, or $3.8 billion more than Wall Street's consensus.
Nvidia's "high valuation" argument could be a completely different story if the company can continue blowing away expectations and pulling forward AI GPU demand for data centers. But considering that every next-big-thing investment has ended with a bubble-bursting event over the past 30 years, it's more than likely that Nvidia's trillion-dollar market cap is eventually going to deflate.
