Returns as of 03/03/2022
Returns as of 03/03/2022
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For much of the past 13 years, growth stocks have been the fuel that propelled the broad market indexes higher. In particular, investors have had an insatiable appetite for tech stocks and the game-changing innovation they can bring to the table.
But the past couple of months have proved challenging for tech investors. Although all of the major market indexes are enduring their steepest corrections in nearly two years, it’s tech stocks that have been among the hardest hit sectors.
Yet according to a select group of Wall Street analysts and investment banks, this near-term pain can be your long-term gain. There are currently three beaten-down tech stocks that analysts believe offer monster upside of between 242% and 288% over the coming 12 months.
Image source: Getty Images.
The tech stock with the most upside, at least among the trio I’ll be discussing on this list, is online investing platform Robinhood Markets ( HOOD -2.38% ).
Shortly after its initial public offering in late July 2021, Robinhood rallied to hit an intra-day all-time high of $85. But as of last weekend, its shares closed below $12. Despite this persistent drubbing, analyst Devin Ryan of JMP Securities maintains a price target on Robinhood of $45. If this price prognostication proves accurate, shareholders would enjoy upside of 288%!
Ryan’s optimism primarily relates to value-added initiatives introduced, and yet to be unveiled, by Robinhood. Ryan has specifically called out the full launch of cryptocurrency wallets, the expected rollout of tax-advantaged retirement accounts, and international crypto expansion, as some of the factors that can send Robinhood to the Street-high price target of $45.
Something else to note about Robinhood is that the company ended 2021 with 17.3 million monthly active users. That was up 48% from the prior-year period. Robinhood has a number of ways that it’s been able to successfully lure new retail investors, including offering commission-free trades for U.S. stocks on major exchanges, parsing out free shares of stock to new members, and providing the ability to purchase fractional shares of stocks.
But for as popular as Robinhood has been, the company has also faced plenty of backlash from the retail community. Specifically, Robinhood has been put under the microscope following its decision to dial back trading activity in certain meme stocks during the January-February 2021 short squeeze events. Even though this move was made due to liquidity concerns, it’s generated a lot of bad PR for the company.
Another concern with Robinhood is that its operating model — at least as of now — is very much dependent on trading activity and retail investor interest in stocks and cryptocurrencies. If stocks and/or crypto stop moving higher, or if volatility wanes, Robinhood could see revenue growth and customer leads dry up quickly.
In spite of Ryan’s bullishness, I don’t believe Robinhood will come anywhere close to $45 over the next 12 months.
Image source: Getty Images.
A second beaten-down tech stock with monster upside is spatial data technology company Matterport ( MTTR -0.52% ).
As recently as the beginning of December, shares of Matterport were changing hands on an intra-day basis for north of $37. As of last week, they briefly dipped below $6. But according to analyst Gal Munda of Berenberg, Matterport can rally to $25 a share. If this call proves accurate, investors would enjoy a 258% return, based on where shares closed this past week.
Munda believes that Matterport has the ability to completely change how the real estate and construction industries operate. Matterport’s spatial data technology can be used to create 3D digital twins of physical objects, which can bring a new level of personalization to the real estate and construction space that didn’t exist before.
Perhaps even more exciting is the role Matterport could play in the metaverse — i.e., the next iteration of the internet that allows users to interact within 3D virtual environments. Matterport’s technology could be relied on to create digital twins of houses or landmarks that’ll be placed into these virtual worlds. Keep in mind that the market value of the metaverse could stretch well into the trillions.
In terms of operating performance, Matterport is growing like an industry leader. Last year, the company nearly doubled its total subscribers to 503,000, with annual recurring revenue (ARR) increasing to $66.1 million from $45.1 million in 2020. With subscriptions accounting for the bulk of its revenue, it has the hallmarks of a company that could eventually generate juicy margins.
However, Matterport isn’t even close to being profitable yet. Even worse, its price-to-sales multiple remains high, even after its recent tumble. Based on the midpoint of the company’s 2022 full-year sales guidance ($130 million), Gunda’s price target would imply a price-to-sales multiple of 50! That simply doesn’t seem feasible with market volatility picking up.
Image source: Getty Images.
The third beaten-down tech stock that Wall Street believes has immense upside is fintech company StoneCo ( STNE 1.29% ).
It’s been quite the round trip for shares of StoneCo. Between mid-February 2021 and late February 2022, the company’s shares fell from an intra-day high of $95 to briefly below $10. And yet, Morgan Stanley analyst Jorge Kuri sees abundant upside. Kuri’s price target of $39 implies a gain of 242% over the coming year.
Interestingly, Kuri significantly reduced his price target on StoneCo in January, citing higher expenses and tougher competition. Nevertheless, the Morgan Stanley analyst believes the company is attractively priced relative to forward-year earnings estimates.
Growth has certainly not been an issue for this Brazilian-focused fintech stock. As of the end of the third quarter, StoneCo recognized a nearly 54% increase in total payment volume (TPV) on its network, with a quadrupling in the number of active bank accounts. There’s a long runway for StoneCo to benefit from offering payment, software, and financial solutions (i.e., loans) to small businesses and micro-merchants in Brazil. The velocity of its TPV and banking account growth demonstrates that it’s only begun scratching the surface with regard to its potential.
But there are very clear concerns about the company’s near-term performance. For instance, StoneCo’s loan division is backed by its debt. That’s worrisome when taking into account the high levels of inflation the Brazilian economy is contending with. The company has avoided passing along higher costs for fear of chasing away some of its clients, but will likely have no choice but to capitulate and increase its fees to offset inflationary pressures.
The company also has a lot of explaining to do on the cost front. Everything from selling expenses to administrative costs are up significantly as a percentage of total revenue through the first nine months of 2021, compared to 2020.
Even though I’m a fan of StoneCo and believe the company has plenty of promise, it could be difficult to reach $39 without concretely addressing these concerns.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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