Always take Wall Street's price targets with a grain of salt. They can change often -- and already have several times just during the preparation of this article about the three stocks below.
Still, it's often helpful to understand why analysts see upside or downside potential. In reading their thoughts, investors can expose themselves to arguments for or against a particular company that they may not have considered otherwise.
Here's why Wall Street loves beverage maker Celsius Holdings (CELH 0.90%), fashion apparel site Revolve Group (RVLV -1.48%), and online home goods store Wayfair (W -3.04%) right now.
Celsius: Implied upside of 42%
Of the analysts who follow Celsius stock, most agree it still has strong upside potential. Even though shares of the energy drink company are already up about 2,500% in just the past three years, the average price target is higher still at $118.83 per share, according to TipRanks. And a lot of the bullishness stems from the company's partnership with PepsiCo.
On Aug. 1, Pepsi invested $550 million in Celsius, which could potentially convert to an 8.5% ownership stake in the future. But Celsius benefits now by gaining a distribution partner that's one of the biggest in the world. Not only can this accelerate its already rapid expansion in the U.S. but it can also help it gain ground internationally.
There's reason to believe Celsius can steal market share in the energy drink space as it expands its distribution network. Consider that according to management, Celsius had just a 4.1% market share as of this April. However, of the energy drinks sold on Amazon.com, Celsius commanded a whopping 22.6% of sales, as of the second quarter of 2022. This suggests the company's products are extremely popular within their current distribution channels. And so logically, greater distribution should translate that popularity into overall market share gains.
Celsius is already profitable with $15.8 million in net income in the first half of 2022. And it has $60 million in cash, no debt, and just recently received that additional $550 million from Pepsi. The stock is expensive, to be sure. However, the company is in its best financial shape ever and its expansion appears poised to accelerate. Therefore, the buzz on Wall Street for Celsius stock is understandable.
Revolve: Implied upside of 35%
While Celsius stock is "only" down about 24% from its all-time high, Revolve Group stock has sunk 75%. However, that hasn't caused Wall Street to give up on it. The majority would still recommend buying with an average price target of $29.73 per share, according to TipRanks, versus a current price of about $22.
Revolve partners with social media influencers to promote its styles and brands. The company carries a lot of merchandise in small amounts and increases orders with third parties as it sees projected consumer trends materialize. It's constantly adjusting its sails to the ever-changing winds of fashion. And this is likely why it's been able to amass nearly 2.2 million active customers as of the second quarter of 2022 -- up sharply from the 1.4 million active customers it had when it went public three years ago.
Customer growth is one of the reasons Needham analyst Anna Andreeva recommends buying Revolve stock and has given it a price target of $40 per share, according to The Fly. BTIG analyst Camilo Lyon is less bullish with a price target of $31 per share. But Lyon would still recommend buying Revolve stock, in part thanks to its reasonable price-to-earnings valuation of around 20 -- roughly the same as the S&P 500.
S&P 500 P/E Ratio data by YCharts
Revolve's net sales growth fell from 27% in Q2 to just 10% in July. As the company's co-founder and co-CEO Michael Karanikolas succinctly explained, "Consumers aren't doing quite as good right now." But investors might want to put emphasis on "right now."
Revolve's revenue slowdown is related to the economy and not to its business model. This gives shareholders reasonable hope that the company could see a rebound in financial results over time. In the meanwhile, Revolve is profitable and has $238 million in cash with no debt, putting it in a strong position to weather the storm -- and potentially even acquire competitors in the space that aren't as well-funded.
Wayfair: Implied upside of 110%
Wayfair stock has plummeted more than 90% from its all-time high -- even worse than Celsius or Revolve. But Wall Street believes the sell-off is overdone. The average price target from analysts is $65.11 per share (versus a current price of about $31), according to TipRanks.
For Credit Suisse analyst Stephen Ju, Wayfair has incredible upside because of how big its market is. And this is something the company talks about as well. Management believes its total addressable market will be $1.2 trillion by 2030. For perspective, Wayfair has generated about $13 billion in trailing-12-month revenue. And for this reason, the company believes it can increase its revenue by more than 700% over the next 10 years by taking a greater share of this enormous market.
That may happen in time. But for now, Wayfair's growth is taking a breather. Revenue in the second quarter of 2022 was down 15% year over year as consumers pull back from unusually high spending during the early days of the pandemic. The company's cash flow has turned negative, leading management to make course corrections, which included laying off 5% of its workforce in August. Focusing on its cost structure was a move that Stifel analyst Scott Devitt praised when issuing his lofty price target of $60 per share, according to The Fly.
Analysts do see risk with Wayfair stock, but they believe the valuation is cheap enough to more than fairly compensate investors for that risk. For example, UBS analyst Atul Maheswari points to Wayfair's forward price-to-sales (P/S) ratio of about 0.5, according to The Fly. And since Maheswari's comments, Wayfair stock has fallen further and now trades at its cheapest P/S valuation ever on a trailing basis, as the chart shows.
W PS Ratio data by YCharts
Past growth gives Wall Street hope that Wayfair can still be a long-term revenue-growth machine. And that's why many believe the stock could double or more from here.
My upside pick
Of these three companies, the one I'm least likely to invest in right now is Wayfair, even though Wall Street gives it the most upside potential. To be clear, business results are trending down for both Wayfair and Revolve. But Revolve at least has a strong balance sheet and is consistently profitable. Wayfair doesn't have those qualities.
Revolve Group stock has the best valuation of the stocks in this article, which may appeal to some value-minded investors. But for me, valuation is just one component of an investment thesis -- growth is another.
When it comes to Revolve, it could be playing in a space large enough to support long-term growth. However, I'm unsure how big the market is for online fashion apparel for women of the Millennial and Gen Z generations, the company's target demographic.
By contrast, Celsius is certainly operating in an enormous space. The global energy drink market could exceed $100 billion by 2031, according to Allied Market Research. With roughly $500 million in trailing-12-month revenue, that leaves plenty of growth potential as Pepsi takes the brand global. Therefore, this would be the stock I'd buy today if I were forced to pick one of these three.
