Which of These 3 Growth Stocks Could Yield the Best Returns?
Several growth stocks have rebounded this year on improved investor sentiment, even as macro uncertainty continues to impact businesses. While many experts anticipate the Federal Reserve holding on to interest rates at current levels, based on data revealed by recent economic releases, it is worth noting that inflation still remains above the Fed’s target of 2%.
With an uncertain macro backdrop in mind, I used TipRanks’ Stock Comparison Tool to compare the following growth stocks and pick the most attractive one, as per Wall Street analysts.
Netflix (NFLX)
Streaming giant Netflix (NASDAQ:NFLX) reported mixed second-quarter results in July. The company’s second-quarter earnings topped estimates, but revenue lagged expectations. Revenue grew 2.7% year-over-year to $8.2 billion, with the company adding 5.9 million members in the quarter amid its crackdown on password sharing.
Netflix expects its top-line growth to accelerate in the second half of the year, as the complete benefits from the paid sharing initiative and the ad-supported plan begin to materialize. In particular, it projects third-quarter revenue rising 7.5% to $8.5 billion.
Recently, Loop Capital analyst Alan Gould upgraded Netflix stock from “hold” to “buy” and increased the price target to $500 from $425, citing improving fundamentals. The analyst expects Netflix’s competitive position to gain from price hikes and reduced content spending by rivals.
Gould believes that the company is best positioned for the Hollywood strike due to its larger pipeline of unreleased content and global production network. Additionally, he thinks that the strike will accelerate the decline of the traditional TV business and benefit streaming companies, in particular market leader Netflix.
The analyst also noted that Netflix’s paid-sharing initiative has been better than expected. He projects the company’s advertising plan becoming a major contributor to the company’s growth.
On TipRanks, Netflix scores a “moderate buy” consensus rating based on 20 buys, 12 holds and two sell ratings. Following the solid rise in the stock so far this year, the average price target of $473.52 implies nearly 7% upside potential.
Block (SQ)
Fintech giant Block (NYSE:SQ) reported better-than-anticipated results for the second quarter of 2023 and also raised its full-year EBITDA guidance. Despite macro pressure on consumer spending, the company’s revenue increased 26% to $5.5 billion. Cash App (the company’s peer-to-peer payment ecosystem) generated revenue of $3.6 billion, while the Square ecosystem (targeting sellers or merchants) contributed $1.9 billion in revenue.
However, shares fell following the results, as the company’s second-quarter gross payment volume (GPV) lagged expectations and the management’s commentary indicated a slowdown in the gross profit growth rate.
Management said that it expects gross profit to grow by 21% in July, marking a slowdown from the 27% growth seen in the second quarter due to transaction margin compression. Looking ahead, the company is focused on driving further efficiencies to improve profitability, while continuing to invest in key growth areas.
Following the results, Macquarie analyst Paul Golding reaffirmed his “buy” rating on SQ stock with a price target of $100. The analyst noted that the U.S. payments space broadly de-rated in the recent earnings cycle, with both Visa (NYSE:V) and Mastercard (NYSE:MA) reporting relatively subdued domestic volumes and PayPal reporting weak transaction margins.
That said, Golding highlighted that despite macro pressures, Block “is still pivoting as a profitability-focused business.” He said that among large fintechs, Block continues to be his top pick, given many opportunities to address the needs of the global consumer and enterprise markets as well as small and mid-size merchants.
With 20 buys and six holds, Block scores a “strong buy” consensus rating. The average price target of $86.26 implies nearly 55% upside potential.
Tesla (TSLA)
Shares of leading electric vehicle (EV) maker Tesla (NASDAQ:TSLA) have enjoyed a strong year-to-date run. However, several analysts are skeptical about Tesla due to the impact of growing competition and price cuts on the company’s profitability.
Tesla triggered a price war by slashing the price of its EVs to boost volumes. The impact of the lower average selling price could be seen in the second-quarter results, with operating margin declining 493 basis points year-over-year to 9.6%.
Last week, the company unveiled a revamped Model 3 in China with a higher price tag, while yet again announcing price cuts for its premium Model S and Model X SUVs in China and the U.S. It also reduced the price of its full-self driving (FSD) technology by $3,000 to $12,000.
Reacting to the news, Barclays analyst Dan Levy noted that the latest price cuts indicate a further rise in existing discounts on Tesla’s inventory and “add to questions on whether 2Q will prove to be gross margin trough.”
Also, the analyst anticipates the company announcing additional discounts to drive higher volumes, reaffirming the expectation for a downward revision to the 2024 consensus earnings per share (EPS) estimate. Levy has a “hold” rating on TSLA stock with a price target of $260.
Overall, Wall Street has a “hold” consensus rating on Tesla stock based on 12 buys, 13 holds and five sells. The average price target of $257.75 implies 3% upside potential from current levels.
To conclude, analysts are more bullish on Block than Netflix, while they are sidelined on Tesla. Wall Street sees the pullback in Block stock as a good opportunity to build a position and benefit from the secular trend of transition to digital payments.
On the date of publication, Sirisha Bhogaraju did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
