When Apple (AAPL) started its descent back in late 2012, no one thought it would lose roughly half its stock value.
However, there are many times when you can not predict or foresee such losses, when the reasons make no sense and Wall Street does something illogical.
In those instances, great value investing opportunities can be created.
Other times, like Netflix (NFLX) in 2011 or Keurig Green Mountain (GMCR) in recent memory, the reasons for loss are easy to understand, and rather predictable. Sometimes you can find value in the aftermath, like NFLX, and other times you can not.
With that said, let’s take a look at five stocks that could very likely be cut in half at some point over the next two years. Some of these stocks are trading at all-time highs on the back of multiyear rallies, while others are near 52-week lows.
After we establish the reason that such losses are possible, if not likely, we can determine whether a Netflix-like investment opportunity will emerge from the loss
Stocks That Could Be Cut in Half: Netflix, Inc. (NFLX)
Netflix (NFLX) stock has already had one epic collapse, and as a current Wall Street favorite, it is tough to imagine another like last time.
However, another fall is inevitable.
NFLX’s market capitalization is $55 billion, similar to that of Twenty-First Century Fox (FOXA), and that valuation is entirely supported by the notion that Netflix can maintain its growth and become a far larger company.
But soon enough, growth will slow significantly as the market tightens, and also due to the influx of new competition.
Once growth slows, investors will realize that the chances of it growing from $5.5 billion in annual revenue to $29 billion — like that of FOXA — are slim to none. NFLX stock will then likely crash lower on turned sentiment.
The fact is consumers have more choices, and Netflix can’t raise prices the way it must to support a $53 billion valuation. In retrospect, $53 billion is NFLX’s peak market capitalization based on max potential, so any bumps in the road could spark massive stock losses.
However, if NFLX stock does get cut in half, and the company is still maintaining a double-digit growth rate, I’ll be first in line to buy the stock.
Netflix is a great company. Its stock is just too expensive.
Stocks That Could Be Cut in Half: Under Armour Inc (UA)
Under Armour (UA) stock is nearly 20% off its all-time high. However, even after these initial losses, UA stock could still fall another 50%.
It’s not hard to imagine big losses after a five-year, nearly 500% gain, after all. Naturally, Under Armour has just become too expensive.
The consensus among analysts is that Under Armour will earn $1.36 per share next year. In the event that it were to fall 50%, and trade at $42 per share, UA stock still would trade at more than 30 times earnings. That is very expensive given the fact that the equally fast-growing Skechers (SKX) trades at just 14 times earnings.
Nonetheless, in the event that this all plays out, and UA does reach $42, it would be a great investment opportunity. However, it will have little to do with Under Armour’s apparel business, but rather its performance in the basketball shoe arena.
UA already has an endorsement with Stephen Curry that could drive footwear revenue for many years to come, while also attracting other big-name endorsements. However, it must capitalize on the momentum created from Steph Curry. If so, UA will be a great investment. If not, it’ll still be too expensive.
Stocks That Could Be Cut in Half: Sprint Corp (S)
Sprint (S) stock has fallen 45% in the post-Softbank (SFTBF) era, and has fallen more than 12% in the last month alone. These big losses are a reflection of a company that lacks a plan, as well as a CEO that is sending mixed signals by trying to undercut all of its competitors only to turn around and cut costs drastically (and raise data prices) in an attempt to become profitable.
The problem is that Sprint has dug itself too big of a hole, and it is tough to imagine a scenario where it gets out. Specifically, Sprint’s financials are an absolute mess. The company has more than $32 billion in net debt, and with a free cash flow loss of more than $5 billion over the last 12 months, I don’t see its financials getting much better anytime soon.
So with all that said, 2016 could be bad for two reasons.
First, Sprint pulled out all the stops during its last quarter, and its 1.1 million new customers during the period still was worst among the four nationwide carriers. Now that Sprint is trying to cut $2.5 billion in costs, there’s a good chance that it’ll slip back into subscriber losses.
Second, Sprint’s debt will come under a microscope. Sprint had just $1.1 billion in debt mature in 2015, but in 2016 approximately $3.667 billion in debt will mature. Therefore, Sprint can’t pay its debt, subscriber growth is fickle at best and the company will remain unprofitable.
As a result, even a $1.75 stock price looks too expensive, as this is a company that could ultimately face bankruptcy.
Stocks That Could Be Cut in Half: Tesla Motors Inc (TSLA)
Tesla (TSLA) stock is down roughly 20% from its 2015 highs, but the losses could very well keep on coming.
TSLA’s 610% stock gains over the last five years were mostly driven by speculation, with its expectation to deliver 50,000-52,000 new vehicles this year still just a fraction of what General Motors (GM) or other large auto companies will ship. With Tesla’s valuation more than half of GM, investors should expect the honeymoon to soon end.
If TSLA stock were to fall 50%, its market capitalization would be $15 billion. In retrospect, that still would be expensive for a company of its size that is very unlikely to become profitable at any point in the foreseeable future.
That said, back in late October, Consumer Reports dug into Tesla’s Model S with a “worse than average” rating, criticizing the vehicle’s reliability. This caused a 10% decline in the stock price, and it’s an action that I expect to have lingering effects. Not only do millions of consumers read and rely on such reviews to make big purchases, but even Tesla has used its high praise — like Motor Trend Car of the Year and Best Overall Car by Consumer Reports for two years in a row — to sell investors a bullish outlook.
With the stock priced for perfection, adversity is not something TSLA stock should respond well to. Albeit, even if TSLA stock were to get cut in half, I’d still favor the much cheaper GM.
Stocks That Could Be Cut in Half: Amazon.com, Inc. (AMZN)
Since Amazon.com (AMZN) decided to disclose performance figures for Amazon Web Services, its stock has surged from $390 to $670. That’s a difference of $130 billion to AMZN’s market capitalization.
However, while I agree that AWS is very valuable, the fact is the market is valuing it and AMZN’s core e-commerce business far too high.
In a previous article, I acknowledged that AWS very well could be worth $85 billion, or roughly 25% of Amazon’s stock value. However, sooner or later, the market will see that AMZN’s core e-commerce business is not worth $230 billion, but closer to $70 billion.
Specifically, Walmart (WMT) has a market capitalization under $200 billion and it created more revenue in its last quarter alone than AMZN has in a full year. Not to mention, Walmart’s e-commerce business is actually growing at about the same rate as Amazon’s. Alibaba (BABA) is another far larger company that is growing much faster than AMZN but is worth less.
Given the fact that Amazon’s core e-commerce business is hardly profitable, a 0.9 times sales ratio should be seen as fair. That would value it close to $70 billion, and when combined with the $85 billion for AWS, we arrive at a $155 billion valuation — about half of its current market capitalization.
Albeit, AMZN is flying high with a lot of momentum, and remains a great company because of AWS and management’s willingness to diversify its business beyond e-commerce.
If AMZN stock got anywhere near $155 billion in market cap, I’d be a buyer … just not at its current price.
As of this Brian Nichols owns shares of AAPL, BABA and SKX.