Predicting the future is hard, but it's all in a day's work for a Wall Street analyst. As part of their job, these analysts publish one-year stock price targets for the companies they follow. It's just one piece of data to consider, but it could give investors a good sense of the future potential of the stocks they are looking to purchase.
We asked three Motley Fool contributors to highlight one company that analysts think has a massive upside potential based on Wall Street estimates. They came up with Twilio (TWLO -0.55%), Upstart (UPST -0.58%), and Lemonade (LMND -0.06%).
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Twilio: Implied upside of 162%
Danny Vena (Twilio): One fact that became abundantly clear during the pandemic was the need for customers to be able to reach out to businesses they frequent, anytime, anywhere. The difference between success and failure can hinge on this important round-the-clock connection. That's where Twilio comes in.
The company provides the tools and a cloud-based framework that help developers embed communications capabilities in apps and software, keeping the lines of communication open with their customers. Twilio's communications platform-as-a-service (CPaaS) is the gold standard, allowing consumers to reach out to businesses via chat, text, phone, video, and more -- all without ever leaving the app.
The majority of consumers have likely used Twilio's services without even knowing it. Its platform processes communications behind the scenes, providing a seamless experience from websites or in-app chats with customer service, handling such mundane tasks as resetting a lost or expired password or providing real-time updates on the status of your ride-share, grocery delivery, restaurant order, and more.
Twilio licenses its industry-leading solutions so businesses don't have to spend time and effort developing less effective or more costly communications strategies. As a result, the company's large recurring revenue stream is the envy of its rivals.
The financial results illustrate the company's success. Twilio's revenue grew 65% year over year during the first nine months of 2021, though it isn't yet profitable as it races to secure market share. Twilio's client base continues to climb, with 250,000 active customers, an increase of 20%.
The company's dollar-based net expansion rate hit 131% in the third quarter, meaning that its current customers spent 31% more than they did in the year-ago quarter. This performance extends the company's unbroken streak, having kept that metric above 118% each and every quarter going back more than five years.
Twilio generated revenue of $1.76 billion in 2020, an amount that pales in comparison to its total addressable market (TAM), which management estimates at $79 billion. This helps to illustrate the massive opportunity that remains.
Finally, while Twilio's valuation isn't cheap based on traditional metrics, its price-to-sales ratio recently dropped a level not seen since the onset of the pandemic. Furthermore, Oppenheimer analyst Ittai Kidron maintains a buy rating on Twilio stock with a $550 price target, suggesting upside for investors of roughly 162% over the coming year.
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Upstart: A possible triple from here
Will Healy (Upstart): Changing business conditions have hit Upstart stock hard. Since rising to an intraday high of over $400 per share in October, the stock dropped quickly, losing over 70% of its value in about three months. Concerns over how omicron might affect lending volumes and other challenges have left investors questioning whether the AI-driven lender can justify what had been a massive surge in the stock price.
However, after the surge, analysts appeared to see this sell-off as overdone. In early December, Peter Christiansen, a Citi analyst who covers Upstart, increased his price target to $350 per share. Should the stock meet this target, it would not only bring the stock within 13% of its all-time high, but it would also translate to a 227% increase in the stock for the year!
Upstart is poised for growth as borrowers with lower FICO scores could turn to Upstart's AI-driven loan system. Furthermore, Upstart has recently gone into auto lending and is looking to enter the mortgage loan business. Such moves should drive revenue much higher over time.
Recent quarters have not disappointed. The $544 million in total revenue for the first nine months of 2021 spiked 271% higher compared with the first three quarters of 2020. With operating expenses growing 220% during that period, the company reported over $76 million in net income in the first three quarters of 2021, up from just under $5 million during the same period in 2020.
Investors soured on the stock when projected revenue of $255 million and $265 million for Q4 meant only 200% revenue growth at the midpoint. Though that rate of increase technically means a slowdown, companies rarely sustain such growth rates, and current revenue growth remains well into the triple digits.
Despite a massive decline, Upstart stock has still risen 92% from year-ago levels. Additionally, its price-to-sales (P/S) ratio of 15 is at its lowest level since last spring and far below the 60 sales multiple from September. Considering the revenue growth, a discounted stock price, and the new lines of business, a $350 per share price seems within the realm of possibility.
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Lemonade: A potential 197% gain
Brian Withers (LMND): Lemonade's shareholders have been on a rocky ride since its initial public offering (IPO) in July 2020. Today, the stock is trading at 52-week lows and almost at its IPO price of $29. But for some Wall Street analysts, the stock won't stay at this price for long. Analysts have an average price target of around $56, but one analyst is even more bullish. JMP Securities analyst Matthew Carletti has a one-year price target of $95, a potential 197% gain from the recent $32 price. Let's look at why Carletti might be so bullish on the stock.
The company has come a long way from its founding in 2009 when it started offering renters insurance to customers. It's since expanded into homeowners, life, pet, and even auto insurance. The company looks to capture young adults who may never have bought insurance before. Its easy-to-use app and chatbots that help handle simple transactions appeal to young "digital natives" who grew up with devices as an integral part of their lives. Once these young adults are hooked on Lemonade's model, they will likely add more products over time and upgrade from renters to homeowners insurance.
Its strategy is working. Today, only 51% of its annual premiums come from its low-cost renter's insurance. Last quarter, it topped $347 million in annual premiums, a gain of 84% year over year. It grew its customer base 45% from the previous year's 1.4 million. Lemonade's results are impressive on their own, but what could drive the company's stock to skyrocket is its acquisition of Metromile (MILE).
Metromile is an auto insurance provider that uses a low monthly subscription rate plus a per-mile fee. Customers who drive less during the month will see a decreased insurance premium for the next bill. Currently, the auto insurer has a run rate of $114 million in auto premiums but is only offering its insurance in eight states today. Lemonade only offers its auto insurance in Illinois. This is only a small piece of the $250 billion auto insurance market in the U.S.
Lemonade's management team estimates that its 1.4 million customers are spending more than $1 billion per month in auto premiums . Between Metromile's licenses to sell in 49 states in the U.S. and Lemonade's current customer base, this acquisition (done right) could be a home run. The acquisition is expected to close in Q2 2022.
Today, investors have an opportunity to buy Lemonade at more than 80% off its high. Even if Carletti's price target is short of where the stock will be in a year, the future looks tremendously bright for this insurtech. Investors will do well to buy a few shares today.
