Analysts' price targets can help investors get an idea of whether there's a lot of bullishness surrounding a stock. But in some cases, a high upside can simply be due to elevated price targets that are in need of a trim due to changing economic conditions or company-specific developments.
Three stocks that could rise by at least 50%, according to Wall Street estimates, include medical equipment maker ResMed (NYSE: RMD), media giant Warner Bros. Discovery (NASDAQ: WBD), and payment service PayPal (NASDAQ: PYPL). Let's see how realistic these predictions really look.
1. ResMed
The consensus analyst price target for medical device maker ResMed is just under $262. If it reaches that valuation, then the stock will have risen by close to 58% from where it is right now. That's even as some analysts have been lowering their price targets for the stock in August.
While many device makers design products for hospital use, ResMed says it makes devices so that people can avoid hospitals. Its products help with sleep apnea and provide respiratory care, including ventilators. It also generates revenue through its out-of-hospital digital solutions that enable providers to offer personalized care to patients.
ResMed recently wrapped up its fiscal year on June 30. Sales for the year rose 18% to $4.2 billion while its profit rose 15% to $897.6 million.
Its gross margin did deteriorate during the year by close to a percentage point, and that was a reason investors and analysts weren't thrilled with the results, leading to a sharp sell-off in ResMed's valuation. Year to date, it's down 20% and trading at 27 times earnings -- in line with the average healthcare stock.
Overall, ResMed could be a good buy on the dip as there is huge potential in treating people with sleep and respiratory products at home, especially as the population ages and seniors account for more of the demographics.
2. Warner Bros. Discovery
Shares of Warner Bros. Discovery are up 33% this year as it has largely outperformed the S&P 500, which is up around 15%. Despite the rise in value, analysts' consensus price target sees the stock rising another 60% to of over $20.
The media and entertainment company posted its second-quarter earnings in August, which fell short of Wall Street's estimates as its loss per share of $0.51 for the period ended June 30 was deeper than the $0.38 loss analysts were expecting. The number of streaming subscribers was also a bit light at 95.8 million versus the 96.7 million that analysts forecast.
Warner Bros. launched its new Max streaming service in May, which includes content from both its HBO Max service plus Discovery+, in an effort to give consumers a more comprehensive option and potentially drive subscriber numbers up.
The company isn't profitable right now, but with more than $10 billion in quarterly revenue, its run rate of more than $40 billion in annual sales would mean that the stock is trading at a price-to-sales multiple of less than one.
Given its low valuation, the streaming stock can be a good buy -- but it isn't without some considerable risks. The ongoing Hollywood writers' strike will likely impact new content offerings, which, in turn, may affect revenue and whether subscribers sign up or keep its Max streaming service.
If that happens, the share price could tumble, at least in the near term. But if you're holding the stock for the long term, then it becomes less of an issue.
3. PayPal
PayPal hasn't been having a great 2023 as its shares are down 16% since January. But analysts believe it can rise to more than $92 a share, implying an upside of approximately 55% for the fintech stock. The company's growth rate has been slowing down in recent years, and the business simply isn't the growth machine it once was, resulting in investors ditching the stock of late.
At 17 times earnings, PayPal isn't an expensive stock to own as the average stock on the S&P 500 trades at a multiple of 20 times its trailing profits.
The counterargument would be that with just a 7% growth rate in the latest quarter (ended June 30), it's not growing at a fast enough rate to justify much of a premium, if any at all. And with a growing number of payment options out there, including Apple Pay, which could chip away at its market share, PayPal's growth days could also be numbered in the long run.
Another worrying sign is that the number of active accounts the company reported last month totaled 431 million. That's the second straight quarter that metric has declined. As of the end of 2022, PayPal reported 435 million active accounts. There's a viable concern here that the business may be plateauing.
It's a bit early to throw in the towel on PayPal's stock, however. E-commerce has room for many types of payment services, and in the midst of a slowdown in the economy, it's hard to blame PayPal for a slowing growth rate; many businesses are facing these issues right now.
PayPal can make for a good contrarian investment as it definitely has the potential to outperform in the long run. And while there are challenges for the business and the stock has been declining, it's far too early to say PayPal is in any significant trouble.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, PayPal, and ResMed. The Motley Fool recommends Warner Bros. Discovery and recommends the following options: short September 2023 $67.50 puts on PayPal. The Motley Fool has a disclosure policy.
