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Ulta Beauty Inc(ULTA-Q)

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3 Incredible Growth Stocks That Could Climb 22% or More, According to Wall Street

Motley Fool - Sun Sep 24, 2023

Wall Street analysts don't always get it right, but paying attention to which stocks they are bullish on can point investors toward great stocks that are about to take off.

Revolve Group(NYSE: RVLV), Ulta Beauty(NASDAQ: ULTA), and Netflix(NASDAQ: NFLX) are three growth stocks that Wall Street believes have significant upside from their current share prices, and three Motley Fool contributors see good reasons to believe in these companies' futures. Let's see why these stocks could be ripe for the picking.

This fashion retailer is primed for more growth

John Ballard (Revolve Group): This leading online fashion retailer has weathered the macroeconomic headwinds much better than its slumping stock price would indicate. Revolve offers a wide assortment of on-trend styles across numerous categories, which makes it a go-to online destination for younger shoppers to upgrade their wardrobes.

Revenue fell 6% year over year in the second quarter, but that's better than most other apparel retailers right now. The company is also capable of growing much faster. For example, revenue was up 54% in 2021 and 23% in 2022, and Revolve maintained growth of at least 20% per year before the pandemic.

The stock sells for a reasonable forward price-to-earnings ratio of 26, which seems fair given the company's track record. Revolve recently crossed the $1 billion annual revenue milestone. As the company gains scale, management plans to continue investing additional resources in improving service for customers and increasing its profit margin.

RVLV Chart

Data by YCharts. TTM = trailing 12 months.

Revolve's profit has fallen over the last year, but it's still performing better than other e-commerce retailers that are losing money right now. This validates the company's data-driven inventory management, which helps it keep an optimal balance of supply to meet demand.

Revolve also has a debt-free balance sheet to continue investing in long-term growth initiatives, such as expanding into new product categories like men's fashion and beauty.

The biggest risk here is a prolonged recession, but the stock is already selling 85% off its previous peak, and Wall Street analysts are starting to see value in the shares. The average price target is $19.40, or 55% above the current price. If investors have a long time horizon, it's worth parking a small amount of money in this stock and waiting for stronger consumer spending to lift it higher.

The growth story is back

Jeremy Bowman (Netflix): Netflix stock has been highly volatile over the last couple of years as the company navigates the wave of new competition from legacy media companies, plus the pandemic and how it pulled forward significant subscriber activity.

However, after a lull in its growth, Netflix is getting back to business. It delivered a surge in subscribers in the second quarter, adding 5.9 million new members as it rolled out paid sharing in most of the territories it operates in.

Chief Financial Officer Spencer Neumann previously discussed the opportunity presented by Netflix's password-sharing crackdown at a conference, saying that more than 100 million viewers are borrowing passwords from a paying user.

That gives the company a huge pool of potential customers it's just starting to tap into, and nearly all of the extra cash from those new sign-ups will flow through to the bottom line thanks to the leverage in Netflix's subscription business model.

There's also another key driver that could push Netflix's stock to the next level: advertising.

The ad-supported tier has been slow to gain subscribers thus far, but that's been true of all of the streaming services that have recently launched one. However, Neumann said the company received strong interest at the recent upfronts, where it sells ad inventory to advertisers, and the company is well positioned for long-term growth from advertising given the size of its audience and its ability to target ads in a way that linear TV cannot.

With those two catalysts poised to give it a push and its legacy media competitors struggling to turn a profit, Netflix stock looks well positioned for another round of growth.

It's no surprise, then, that the average Wall Street analyst sees the streaming stock climbing 22% higher in the next year or so. If the company executes on paid sharing and advertising, the stock could do even better.

Carving out its spot as a leader in a growing industry

Jennifer Saibil (Ulta Beauty): The beauty industry has historically been divided into separate categories of low-cost, premium, and direct-to-consumer offerings. As you might expect, they were sold in different places: pharmacies, department stores, or company-owned locations.

Ulta recognized the avid beauty consumer buys different products from all three categories, and it combined them all under one roof, creating superstores that reach the gamut of beauty customers.

The beauty of this model (pun intended) is that it captures the most valuable customers at every socioeconomic level. This has led to soaring revenue and robust profits as Ulta has expanded to more than 1,300 stores and counting.

Beauty is a $430 billion industry that's expected to grow at a compound annual rate of 6% through 2027, according to McKinsey. The premium segment is expected to grow at 8%, but more consumers are reporting shopping across price points and lean toward omnichannel shopping -- in other words, Ulta's sweet spot. While the entire beauty industry will benefit from organic growth, Ulta is uniquely poised to do so.

Investors have been disappointed with Ulta's operating margin, which contracted from 17.0% to 15.5% in the fiscal 2023 second quarter (ended July 29), as well as its guidance for this metric. The stock is down 14% this year despite increasing revenue and profits, and raising its guidance for full-year revenue, comparable-store sales, and earnings per share.

But Ulta's operating margin is still better than where it was before the pandemic, which is a sign of strength. It's also likely to widen as inflation stabilizes, putting less pressure on the company's pricing and costs.

ULTA Operating Margin (Quarterly) Chart

Data by YCharts.

Ulta has tremendous growth opportunities in opening new stores, generating sales from loyal consumers, and entering new markets. The Wall Street analyst consensus calls for the stock to rise 30% over the next 12 months or so, but over the long term, it could go much higher. This is an excellent opportunity to buy on the dip.

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Jennifer Saibil has no position in any of the stocks mentioned. Jeremy Bowman has positions in Netflix and Revolve Group. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix, Revolve Group, and Ulta Beauty. The Motley Fool has a disclosure policy.

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