Since the end of the Great Recession, growth stocks were the fuel that powered the bull market on Wall Street. The Federal Reserve's quantitative easing program kept interest rates near 0%, fostering cheap capital that businesses used to expand their operations.
However, a looming new recession has the Fed stepping hard on the brakes, with an aggressive policy of raising interest rates that could sink the economy. While growth stocks will be the ones to lead the markets, there's no telling when their turnaround will happen. That doesn't mean you shouldn't invest in them; it just means investors need to scrutinize their potential.
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Between 2000 and 2021, the stock market gained an average of 9.5% a year, almost the historical average, but missing just the 10 best days would have cut your returns nearly in half to only 5.3% a year. That means remaining invested in stocks is still the best long-term growth strategy because trying to time a market bottom is more a game of luck than skill.
According to a select group of analysts and investment banks, the latest correction could yield tremendous upside for two supercharged growth stocks. If Wall Street's most generous price targets turn into reality, this pair of fast-paced companies could surge by 235% to as much as 340% over the next 12 months.
HBO Max success should power Warner Bros Discovery
Spun off from AT&T and merger with Discovery earlier this year, entertainment outfit Warner Bros Discovery (WBD -1.07%) burst onto the scene amid a glut of streaming service excess, and its stock has been sent to the discount bin. Shares have lost about half their value since they began trading in April.
Yet Wall Street remains excited about the potential for the owner of HBO Max and some of WarnerMedia's top franchises, like Harry Potter. Analysts have a consensus one-year price target of just under $23 a share, but Credit Suisse analyst Douglas Mitchelson has an industry-high target of $43 a share, which suggests the stock could more than triple from its current price near $13 a share.
He sees Warner Bros Discovery gaining sharply from the success of the Game of Thrones sequel currently playing on HBO Max. According to Mitchelson, this has helped add as many 5 million net additions to the 92.1 million subscribers Warner Bros ended the second quarter with.
Mitchelson does see the streamer facing higher cost of debt and headwinds from the macro environment of the industry, but HBO Max is among the fastest-growing brands, according to Apptopia.
While I don't expect Mitchelson's lofty price target to hit over the next 12 months, I do believe $43 (as well as his previous $52 target) remains in the picture down the line if Warner Bros Discovery continues to execute on trimming the fat from its budget and ensuring the content it produces meets the broadest possible audience.
Roku continues to grow active users
Another supercharged streaming stock with enormous upside, at least according to one Wall Street analyst, is Roku (ROKU 1.58%). If Loop Capital's Alan Gould is right about Roku stock, it could hit $300 a share, or about 340% higher than where it stands now.
According to TheFly.com, Gould said he expected Roku to trade closer to its historic average multiple of forward revenue, though he expects a rising interest rate environment to dull the hypergrowth it had previously been experiencing. Even so, ad spending for connected TV (CTV) should continue to far outpace all other digital advertising media, and Roku, as a leader in the CTV space, should grow "quicker than CTV in general."
Because Roku's platform gives users control over the programming they want, it continues to see strong growth in active accounts. It hit 63.1 million in the second quarter, a 14.5% gain over the year-ago period, and more important to advertisers, a 21% jump in average revenue per user to $44.10.
Because there's no indication Roku won't see those sorts of robust numbers stretch further into the future, there is every reason to believe the connected TV streaming stock can rise much higher over the long haul.
Don't buy into Wall Street's hype
Wall Street has a penchant for drawing straight lines that rise exponentially higher. Just look at any estimate for how big a new, trendy industry can get. Investors putting their hard-earned money on the line should be much more cautious about just how high a stock can go, especially in the space of a short time period such as a year.
I like the potential for the businesses of both Warner Bros Discovery and Roku, and I think it's possible their stocks could reach those high-end target prices ... eventually. But rather than a specific destination, I also think it's more important investors consider the direction a company is moving and where it can be years down the road. Decades, we're talking, not quarters, and these two stocks can still excel well into the future.
