The S&P 500 bounced off its bear market lows in October, and it has trended upward ever since. The benchmark index now sits just 6% from a record high, the point at which a new bull market definitively begins, and that hints at heftier gains on the horizon. The S&P 500 returned an average of 186% during the last nine bull markets.
Upward momentum in the stock market has coincided with more optimistic price targets from Wall Street analysts. Investors should never set too much store by such things, but it never hurts to research the stocks where strategists see substantial upside. Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) and Adyen (OTC: ADYE.Y) currently fall into that category.
Here are the important details.
Google parent Alphabet currently carries a consensus rating of “buy” among the 55 Wall Street analysts polled by CNN Business with a median 12-month price target of $150 per share. The highest target is $200, implying 47% upside from its current price.
Alphabet gave a mediocre financial showing in the second quarter. Revenue rose 7% to $74.6 billion, slower than the 13% growth in the same period last year, but an acceleration from the 3% growth it posted in the first quarter. On the bottom line, GAAP earnings climbed 19% to $1.44 per diluted share as the company successfully kept costs in check and continued to repurchase stock.
Investors have cause to think Alphabet’s top line will grow faster in the future, especially as economic conditions improve and ad spending rebounds. Google is the largest ad tech company in the world by a wide margin, an advantage forged from the immense popularity of Google Search, YouTube, and Chrome. But Google is also the third-largest cloud infrastructure and platform services provider worldwide, and the company has steadily grabbed market share in recent years.
So what? The ad tech and cloud computing markets are expected to expand at 14% annually through 2030. Alphabet should be able to match that at a minimum given its strong foothold in both spaces. That said, the company could grow more swiftly with help from recent innovations like Duet AI for Google Workspace, a product that leans on generative artificial intelligence (AI) to draft text, create images, organize data, and perform other time-saving automations. The generative AI market is projected to grow at 24% annually through 2030, according to Statista.
Here is the bottom line: Alphabet has a great shot at mid-teens revenue growth for the foreseeable future, and earnings per share should grow slightly faster if stock buybacks continue. Indeed, the Wall Street consensus calls for annual earnings growth of 17.6% over the long term. That makes its valuation of 28.7 times earnings look reasonable despite being a premium to the three-year average of 26.2 times earnings.
Patient investors with a time horizon of at least three to five years should consider buying a small position in this growth stock ahead of the next bull market.
European payments company Adyen currently carries a consensus rating of “hold” among the 30 investment analysts polled by CNN Business, but the median 12-month price target of $11.93 per American depositary receipt (ADR) implies 43% upside from its current price, and the highest target of $20.69 per ADR implies 147% upside.
Readers may be unfamiliar with Adyen, but most have likely interacted with its technology, and some probably do so regularly. Adyen unifies payment processing and acquiring capabilities on a single global platform. In doing so, its technology allows merchants to accept credit cards, mobile wallets, and other electronic payments across digital and physical channels without the traditional rigmarole of working with individual processors and acquirers.
Adyen also uses its data, which is more robust than what any processor or acquirer could attain independently, to boost authorization rates, inform marketing decisions, and prevent fraud for its merchants. That value proposition has helped the fintech company land customers like McDonald’s and Microsoft. But Adyen also has a compelling value proposition for platform businesses like Etsy and Uber. Namely, it offers embedded financial services that allow marketplace operators to create business bank accounts, issue cards, and send instant payouts to their own clients.
Adyen saw its share price tumble 39% following its financial update for the first half of 2023. Revenue climbed 21% to 739 million euros through June, the slowest growth on record, and EBITDA slipped 10% to 320 million euros as EBITDA margin contracted 16 percentage points to 43%. The company attributed the slower-than-expected sales growth to economic headwinds from high inflation and rising interest rates, and management said the decline in EBITDA margin was primarily driven by headcount expansion.
Those results are certainly disappointing to some degree, but I think investors overreacted. Economic headwinds are temporary and the headcount expansion supports future growth. Indeed, management expects revenue growth ranging from the mid-20s to low-30s in the medium term, and the company says its EBITDA margin will reach 65% in the long term. In short, nothing whatsoever has changed about the business.
Yet shares currently trade at 4.3 times sales, the cheapest valuation at any point in the past three years. That creates a compelling buying opportunity for long-term investors as triple-digit returns are unlikely in the next 12 months.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Etsy. The Motley Fool has positions in and recommends Adyen, Alphabet, Etsy, Microsoft, and Uber Technologies. The Motley Fool has a disclosure policy.
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