Tesla shares could decline dramatically — and that could mean disaster for a number of stocks that have already seen deep share-price cuts, according to equity research firm New Constructs.
The research firm, which uses machine learning and natural language processing to parse corporate filings and model economic earnings, called the stocks in danger “zombie stocks,” and defined them as companies with poor business models that are burning cash at an alarming rate and are at risk of seeing their stock decline to $0 per share.
The research firm estimates there could be some 300 zombie companies across the marketplace.
“The Federal Reserve’s aggressive rate hikes so far in 2022 have ended the era of free money and exposed a worrisome dynamic throughout capital markets: zombie stocks,” wrote New Constructs CEO David Trainer, in a note.
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New Constructs does not define Tesla Inc.
TSLA
as a “zombie stock,” citing CEO Elon Musk’s ability to raise capital, but does see the electric car manufacturer as a bellwether for the sector. “It shares many of the common characteristics of a zombie stock, such as an outrageous valuation and high cash burn,” wrote Trainer. “We believe Tesla’s unrelenting share price rise over the past three years – where investors completely ignored company fundamentals – inspired the birth of many of today’s zombie stocks.”
Tesla reports its third-quarter results after the closing bell on Oct. 19.
The company’s stock was trading around $220 on Monday, an increase of over 1,000% compared to three years ago. But Trainer feels that Tesla is at risk of falling more than 80% to $25 a share.
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Tesla’s stock has fallen 37.6% in 2022, outpacing the S&P 500 Index’s
SPX
decline of 22.7%.
“Its valuation remains nosebleed high because the cash flow expectations baked into the stock price are unreasonably optimistic,” Trainer wrote. “Our message to investors is to take profits in Tesla and avoid zombie stocks at all costs.”
New Constructs recently added cloud-based communication company RingCentral Inc.
RNG
to its list of “zombie” stocks. Other companies on the list are Freshpet Inc.
FRPT,
Peloton Interactive Inc.
PTON,
Carvana Co.
CVNA,
Snap Inc.
SNAP,
Beyond Meat Inc.
BYND,
Rivian Automotive Inc.
RIVN,
DoorDash Inc.
DASH,
Shake Shack Inc.
SHAK,
Chewy Inc.
CHWY,
Uber Technologies Inc.
UBER,
Robinhood Markets Inc.
HOOD,
Tilray Brands Inc.
TLRY,
Affirm Holdings Inc.
AFRM,
SunRun Inc.
RUN,
Blue Apron Holdings Inc.
APRN,
and meme stocks AMC Entertainment Holdings Inc.
AMC
and GameStop Corp.
GME.
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“Investors are now fed up with these kinds of companies, especially amid this year’s stock market volatility,” wrote New Constructs’ Trainer. “If investors start to give up on Tesla and take profits on the stock, which is up over 1,000% over the past three years, that spells terrible news for all of the other zombie stocks that don’t have the cash-raising luxury that Tesla has.”
