On Friday, Tesco (LSE:TSCO) shares closed at 203p. Down 24% over the past year, the share price has anchored around this level for the past week or so. The broader question is whether this price can be supported, with a potential reversal back towards 300p. On the other hand, could more negative catalysts come and push Tesco shares down to 100p in the future? Here’s my take.
The case for a continued fall
Straight off the bat, I think it’s unlikely that the share price will hit 100p given that it hasn’t traded below 150p in the last decade. However, this doesn’t mean that a continuation of the recent fall might not happen.
The main driver that could cause this would be lower consumer demand due to price inflation. Not only this, but it’s a deadly cocktail for Tesco even if it doesn’t pass the price hikes onto the end customer. While absorbing those costs would help to keep demand high, it would reduce profit margins if the company took the hit instead.
Given that the business operates on razor thin profit margins (in the single-digit percentages), spiralling inflation could easily push the firm into making a loss. In this case, a tumble in the share price would be logical as investors digest this news.
Its latest half-year profits were down 63.9% versus the previous year, with inflation a key issue. In order for the price-to-earnings ratio to be a fair value, a fall in earnings usually corresponds to a fall in the share price in the long run.
Why we could see Tesco shares rally
In the interim results released earlier this month, it was made clear that the business knows what to focus on. It’s trying hard to retain customers through initiatives related to price. These include promotions such as the Aldi Price Match, Low Everyday Prices and Clubcard Prices.
As a result, statutory revenue for the half-year was £32.5bn, up 6.7% on the same period last year. I think this speaks volumes. Even with people tightening their belts, Tesco is still able to grow revenue.
The year high of 301p in Q1 does seem a long time ago. But when I consider if 100p or 300p is more likely going forward, I have to pick 300p. On the basis of strong residual demand and inflation normalising over the next year, profitability should be much stronger in 2023.
Aside from reporting better finances, the other element that could push Tesco shares higher is better investor confidence. With all the issues swirling around at the moment, I feel the share price has dropped in part due to some investors selling stocks in general and holding cash. I’m not criticising it, but ultimately when we’re past the worst of it, I think the stock could rally as long-term investors spot it as a value play.
Overall, I’m thinking about buying Tesco shares as I think the potential reward is higher than the current level of risk.
