Last year was a true running of the bulls on Wall Street. When the final closing bell tolled, the benchmark S&P 500 and growth-fueled Nasdaq Composite had respectively rallied 24% and 43%. Meanwhile, the ageless Dow Jones Industrial Average climbed to a fresh all-time high in 2023.
Since Wall Street's three major stock indexes tend to rise over extended periods, it's not a surprise that most institutional ratings and analyst calls are optimistic. According to data from FactSet Research Systems, 57.3% of more than 10,800 ratings of stocks in the S&P 500 were "buy" ratings, as of March 31, 2022. Another 37.1% were "hold" ratings, while just 5.6% were "sell" ratings.
Image source: Getty Images.
Because downside calls on Wall Street are somewhat uncommon, they tend to stand out -- especially when those calls are made on widely owned and/or high-flying growth stocks.
Based on the bottom-barrel price targets of select Wall Street analysts, three supercharged growth stocks can plunge up to 89% in 2024.
Upstart: Implied downside of 81%
The first high-octane growth stock that at least one Wall Street analyst has soured on is cloud-based lending platform Upstart Holdings (UPST +4.47%). According to analyst Vincent Caintic of Stephens & Co., shares of Upstart could fall to $6, which would represent an 81% plunge from where the stock closed on Jan. 12.
Upstart is attempting to turn a lending industry that's ripe for disruption on its head. Whereas the traditional loan-vetting process can take weeks, Upstart's cloud-based platform is driven by artificial intelligence (AI) and machine learning (ML). This combination of AI and ML allows the platform to make rapid decisions and become more effective at assessing risk over time. The company notes that its AI-driven platform is more accurate when it comes to assessing risk than traditional credit scores.
NASDAQ: UPST
Key Data Points
A couple of Upstart's key performance metrics are quite promising. It closed out the September-ended quarter with 88% of its loans being fully automated, which is a 13-percentage-point improvement from the comparable period in 2022. Automation is imperative to saving applicants time and reducing operating expenses for lending institutions.
It's also worth noting that more than 100 banks and credit unions are now leveraging the company's AI-driven lending solutions. There's genuine excitement that Upstart's platform could broaden the pool of potential borrowers for lenders.
But it's not all peaches and cream, either. The fastest rate-hiking cycle by the Federal Reserve in four decades kicked off in March 2022. Higher lending rates often lead to a rise in delinquencies, as well as lower loan demand. Upstart's adjusted quarterly profits quickly sunk into the loss column.
The other core concern for Upstart is that its operating model isn't time-tested. A couple of money-based metrics suggest a deflationary recession could be in the cards for the U.S. economy in 2024. Economic downturns usually lead to higher loan delinquency rates and reduce the willingness of banks to lend.
While a $6 price target may be a bit too pessimistic, there are a wide range of potential outcomes for Upstart in 2024, including a choppy year for its stock.
NASDAQ: PLTR
Key Data Points
Palantir Technologies: Implied downside of 70%
A second high-profile growth stock that could absolutely plummet in 2024, if one Wall Street analyst's price target is correct, is data-mining company Palantir Technologies (PLTR +2.45%). RBC Capital analyst Rishi Jaluria recently reiterated his underperform rating and $5 price target for shares of Palantir, which implies downside of 70% (based on the Jan. 12 close).
The lure of Palantir for investors is the uniqueness of its operating model. It's comprised of two core operating segments (Gotham and Foundry) that utilize AI to make sense of copious amounts of data. Gotham helps select federal government agencies plan missions and cull data. Meanwhile, Foundry is the company's enterprise-facing platform that helps with streamlining operations.
Gotham has been Palantir's driving force for years. There's no concern about not being paid since its primary customer is the U.S. government, and the contracts Palantir lands are often four or five years in length. The key point being that Gotham is delivering sustained double-digit sales growth and has been pivotal in shifting Palantir to recurring profits, based on generally accepted accounting principles (GAAP).
Comparatively, Palantir's Commercial segment is just getting off the ground. In the U.S., commercial customer count jumped 37% to 132 during the September-ended quarter from the prior-year period, with aggregate commercial customer count growing 45% to 330.
The biggest issue for Palantir looks to be its valuation. Despite achieving recurring GAAP profits ahead of consensus expectations, the company's stock is priced for double-digit growth and steady margin expansion without any hiccups. Jaluria doesn't expect the company to be able to sustain its margin ascent -- especially from its Commercial segment.
As of this past week, shares of Palantir were valued at 56 times forward-year earnings and more than 13 times forecast sales in 2024. Even though its business can't be duplicated at scale, this could be a lofty valuation to support in the new year.
Tesla began deliveries of the Cybertruck on Nov. 30. Image source: Tesla.
Tesla: Implied downside of 89%
The third supercharged growth stock that can plunge in 2024, based on the prognostication of one Wall Street analyst, is electric-vehicle (EV) manufacturer Tesla (TSLA +2.96%). Longtime Tesla bear Gordon Johnson of GLJ Research has a $24.33 price target on North America's leading EV maker, which would translate into 89% downside, based on where shares closed on Jan. 12.
There's no question that Tesla has ridden its first-mover advantages in the EV space to phenomenal gains. The company achieved its target of producing 1.8 million EVs in 2023 (the final figure came in at nearly 1.85 million), and it recently launched its fifth mass-production model, the Cybertruck. According to CEO Elon Musk, Tesla took in more than 1 million refundable $100 deposits to reserve a Cybertruck.
Unlike other pure-play EV manufacturers, Tesla is profitable. It likely registered its fourth consecutive year of GAAP profits in 2023. Tesla's stock has exploded higher because it's demonstrated that its operating model can be profitable on a sustained basis.
NASDAQ: TSLA
Key Data Points
But there are reasons for current and prospective shareholders to be concerned. To begin with, Tesla kicked off a price war with other EV manufacturers last year that resulted in over a half-dozen price cuts for its production models (3, S, X, and Y).
During Tesla's annual shareholder meeting in May, Musk made clear that his company's pricing strategy is based on demand. A steady stream of price reductions suggests that demand is weak and inventory levels are rising. Not coincidentally, Tesla's operating margin has collapsed from 17.2% to 7.6% over the trailing-12-month period (ended Sept. 30).
There's also a growing list of unfulfilled promises from Tesla's chief. For instance, Musk has been suggesting that Level 5 full self-driving is "one year away" for a decade. A sizable percentage of Tesla's market cap is based on Musk's visions becoming reality. Unfortunately, many of these expectations have failed to materialize and could eventually be backed out of Tesla's valuation.
That leads to the logical final point: Tesla's valuation. Although Tesla has tried mightily to become more than an auto stock, it still generates the overwhelming majority of its profit from selling and leasing EVs. Breaking this down even further, 41% of its third-quarter pre-tax profit can be traced to unsustained sources. While auto stocks typically trade at a multiple of 6 to 8 times forward-year earnings, Tesla is commanding a forward-year multiple of 58.
Though Johnson's downside target for Tesla may be a bit extreme, my own prediction is for Tesla to dip below $100 in 2024.
