According to David Trainer, investors are forgetting the fundamentals in pockets of the stock market.
The CEO of New Constructs frequently points out what he says are violations of valuation norms. He called out Coinbase's initial-public-offering valuation, for example, and the stock is since down 24%.
In of his most recent note to clients, he highlighted three more stocks he said had massive downside risk because of their inflated valuations: Tesla (TSLA), Snap (SNAP), and Shopify (SHOP).
While prices fluctuate daily, Trainer said in the note that he thought Tesla could fall as much as 79%, Snap could drop as much as 91% (he said during a call with Insider that it "could go to zero"), and Shopify could drop up to 68%.
During the interview, he shared his reasoning for each of the calls, which is broken down below.
Tesla
Trainer has a laundry list of reasons he thinks Tesla's stock is doomed. In addition to the stock's steep valuation, he said he believed other major players in the automotive industry would rise to compete in a serious way with the electric-vehicle maker.
He said firms like Ford, Volkswagen, and General Motors— or the "incumbents"— were spending 10 times as much on research and development as Tesla.
Tesla bulls like to say the firm has a big head start on legacy automakers in terms of infrastructure and ability to scale. But Trainer pushes back on this, saying that Elon Musk has consistently overpromised how many cars the company would be able to produce.
"They don't have scale," he said. "Tell me where their scale is. GM has scale. Ford has scale. Volkswagen has scale. And their ability to manufacture scale has proven to be more difficult than what Tesla and Elon Musk expected. Otherwise, they wouldn't be five years-plus behind their own production goals."
He added: "Tell me where we're wrong, and I'm happy to discuss it.
"The idea that they're going to produce more cars than Toyota at a similar or higher margin — it's like, 'Come on.' And look, even if you believe that's the case, then the stock's fully valued."
He also called Musk a "loose cannon."
On a conference call on Wednesday, JJ Kinahan, a Charles Schwab trading strategist, also said he saw downside for shares of Tesla ahead.
Trainer believes it is worth $148 a share, he said.
Snap
Trainer criticized Snap's business model in terms of its user base.
"It's for kids. Kids can't spend money," he said. Snap sells ads as one staple of its business model, similar to other social-media platforms.
Trainer is critical of Snap because it has already reached 75% of 13- to 34-year-olds but remains unprofitable, he said. Over the past 12 months, they bled $12 billion in cash, he said.
"There are not many more users Snap can hope to reach before the user growth story implodes," Trainer wrote in the note.
He shared a chart that shows investors are implying that Snap will reach the same number of daily active users and margins as Facebook in the years ahead, which he said was unlikely.
Trainer said he believed Snap was worth $7 a share.
Shopify
Finally, Trainer is bearish on shares of Shopify, an e-commerce platform that allows businesses to digitize sales. The stock got a big boost during the pandemic, but Trainer said it had become overvalued.
He said the valuation implied Shopify's gross merchandise volume would grow to five times bigger than Amazon's.
He added that the COVID-19-related boost in sales would be unsustainable and that it faced steep competition.
"We think that's unsustainable, and even they say that," Trainer said. "On top of that, they've really got some big competition, whether it's Adobe Commerce or Square Space. But even Amazon and Walmart, which host their marketplaces for sellers — that's an option for people."
Trainer said Shopify's shares were worth $481 apiece.
The above stocks have made bears look silly over the past year. They could continue to do so. But the higher valuations climb, the higher the potential for downside risk becomes.
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