Could these ultra-popular stocks drop 90% (or more) in 1 year? Wall Street thinks so

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For more than 15 months, investors have benefited from a historic rebound after the coronavirus crash. During the previous weekend, the much followed S&P 500 had gained 95% since hitting its low on March 23, 2020.

While investors are rightly excited about the prospects for a number of innovative companies, three ultra-popular stocks stand out as particularly polarizing. Specifically, the lowest price target among Wall Street analysts for each of the following companies implies a minimal drop 90% over the next 12 months.

Image source: Getty Images.

AMC Entertainment: implied drop of 98%

It is perhaps not surprising that one of the most polarizing stocks, at least from a price target perspective, is a meme action. Cinema channel AMC Entertainment (NYSE: AMC), who is a favorite among retail investors on Reddit, currently has a 12-month price target of $ 1 from Eric Handler at MKM Partners. Handler actually downgraded the company’s rating from neutral to sell in early February, which would now imply a peak of 98% decline over the next year.

While a price target of $ 1 over the next 12 months might be a bit extreme, even for a pronounced AMC bear like me, there is certainly more than enough reason to support Wall Street’s pessimistic tone towards AMC.

The firm’s retail investors, collectively referred to as “apes,” despise when concrete fundamentals are brought into the discussion because they don’t believe their business has anything to do with fundamentals. However, the fundamentals still matter. Operational performance is what ultimately drives a business – not buyers and short sellers – and it will determine whether AMC can save itself or not.

A quick look at movie industry trends and the company’s operational performance will give you a good idea of ​​why most analysts are predicting a 90% drop in AMC’s stock price. . Movie ticket sales have been declining fairly steadily for the past 19 years, and AMC has been spending money at an incredible rate. With the company’s 2027 bonds still priced far from par, the only conclusion to be drawn is that bondholders are not confident that the company will survive in the long run.

The other factor that may influence Wall Street’s ultra-low price targets for AMC is the emotionally-motivated disinformation campaign that artificially inflated this action. An abundance of incorrect claims on message boards and on YouTube regarding hedge funds and short selling created an unsustainable rally.

I’m not entirely sure MKM Partners sees their price target met, but I expect this pump and dump program to end badly sooner rather than later.

Adult and child sitting on sofa playing video games.

Image source: Getty Images.

GameStop: Implied drop of 95%

Another super-popular meme stock that is set to fall off a cliff, at least according to a Wall Street analyst, is the video game and accessories retailer. GameStop (NYSE: GME). GameStop finished the previous holiday weekend at nearly $ 203 per share. Yet, according to Curtis Nagle, analyst at BofA Securities, GameStop is a $ 10 stock. This would imply a drop of up to 95% over the next year, if it materializes.

Like AMC, GameStop took the opportunity to sell shares in order to raise capital. But unlike its meme sidekick, GameStop worked with a considerably cleaner track record from the start. Following multiple capital increases, GameStop is debt-free and has enough cash to fund its multi-year digital gaming transformation. In other words, while AMC’s long-term survival remains highly undetermined, GameStop appears to have secured its survival with capital increases.

The problem for GameStop, and why Wall Street isn’t embracing the Reddit craze, is that it falls far short of turning around a business that has relied on physical outlets for more than two decades. The company’s former management team had no plans for the switch to digital games, which hurt its sales of high-margin used games and forced the company to close stores in order to cut spending.

On the positive side, e-commerce sales nearly tripled last year. But net sales fell 21.5% in fiscal 2020, as the number of the company’s stores fell 12% and same-store sales fell 9.5%. Focusing on store closings and pushing digital gaming will take years for GameStop to return to the dark, and Wall Street knows it.

Believe it or not, I think Nagle’s course goal is too pessimistic. While I don’t think GameStop is worth nearly $ 200, the company’s healthy balance sheet provides enough leeway for its new leadership team to execute its digital transformation. It’s still a stock to be avoided in my book, but it’s nowhere near as dangerous as AMC.

A Tesla Model S plugged into an electrical outlet for charging.

A Tesla Model S plugged in for charging. Image source: Tesla.

Tesla Motors: Implied 90% drop

The last ultra-popular and polarizing title on the list is not a meme title. It is rather the pivot of the electric vehicle (EV) Tesla Motors (NASDAQ: TSLA), which also happens to be the most owned stock on the Robinhood retail investor-friendly online brokerage.

Although it ended the week before at nearly $ 679 a share, GLJ Research CEO Gordon Johnson only set a price target of $ 67 on the electric vehicle giant. Demand problems for Tesla, which are evidenced by more than a dozen price cuts in 2021, and its shrinking auto gross margin, are reasons to hold back investors’ auto darling, Johnson said.

On the one hand, Tesla is doing something that we haven’t seen successfully accomplished in over five decades. CEO Elon Musk has built an auto business from A to Z. Based on the company’s total deliveries of 201,250 in the second quarter, he appears to be on track to deliver 750,000 to 800,000 vehicles this year. Tesla’s battery technology is also currently superior to that of its competitors.

On the flip side, expecting Tesla to retain that advantage as automakers spend tens of billions of dollars on electric vehicles and autonomous technology is wishful thinking at best. Ford and General Motors will each launch 30 new models of electric vehicles around the world by 2025.

Perhaps the biggest problem is that a nearly $ 650 billion company should be able to generate a profit on the product it sells. Tesla could only get into the profit column by selling renewable energy credits to other automakers, or by selling its digital assets (that is, Bitcoin) for a profit. Take away those one-off benefits and Tesla continues to lose money on EV sales and faces an increasingly crowded automotive landscape.

While $ 67 seems unlikely over the next year, I share Johnson’s skepticism about Tesla.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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