Wall Street analysts frequently set price targets for publicly traded companies: a price per share they believe the stock can reach in about 12 to 18 months based on the company's projected financials and valuation. And analysts tend to agree that cloud company DigitalOcean Holdings (DOCN -0.14%) and workplace-management software company Atlassian (TEAM -0.19%) are investment opportunities with upside. They also tend to agree that Upstart Holdings (UPST -0.04%) is trading at its limit.
I implore readers to take price targets with a grain of salt. The analysts rarely hit the price point exactly right, and most of them adjust their price targets multiple times per year. But I do think investors should consider the underlying reasoning used by the analysts to arrive at their bullish and bearish conclusions. And that's what we'll explore with these three companies.
DigitalOcean: Implied upside of 44%
DigitalOcean stock trades around $35.60 per share. The average analyst writing on the stock recommends buying and the average of their price targets suggests a jump of nearly 44% to $51.22, according to TipRanks. While these analysts are somewhat leery of macroeconomic conditions, they're generally upbeat about the company's growth trajectory and rising profitability.
The second point, regarding DigitalOcean's profits, is important. As the company has grown, it's been able to negotiate better prices for its hardware and for its facilities, which has led to gross profit margin improvements. And it hired a disciplined chief financial officer in 2019 who has been instrumental in increasing cash from operations and free cash flow (FCF), all while maintaining healthy top-line growth.
DOCN gross profit margin (quarterly) data by YCharts.
DigitalOcean expects to generate $1 billion in revenue by 2024, nearly double what it's generated over the past 12 months. Simply put, that would be impressive. But to reiterate, analysts are worried about economic conditions right now. For example, Oppenheimer analyst Timothy Horan recommends buying DigitalOcean stock and has a price target of $80 per share, according to The Fly -- the highest price target I'm aware of. However, Horan does hedge his bullishness by saying macroeconomic conditions could affect DigitalOcean's customer base of small and medium-size businesses (SMBs), making this coming year "uncertain" for the company.
It's true that the global economy is slowing and that SMBs can disproportionately be affected. It's also true that DigitalOcean employs a usage-based business model that's negatively affected by dwindling activity on its platform. And that could happen because of the aforementioned slowing economy. Therefore, it might be hard to hit its 2024 targets.
That said, the flexibility in DigitalOcean's pricing could actually make it easier to retain customers. If these SMBs experience slowdowns, their costs with DigitalOcean will also go down and save them money. Therefore, it's reasonable to assume the company can keep its customer base during lean times and be poised for higher revenue growth when macroeconomic conditions improve.
Atlassian: Implied upside of 56%
Atlassian stock crushed the market since going public in late 2015 and is up over 600% compared to the less than 100% return of the S&P 500. More recently, it's been a laggard, with shares down more than 50% from their highs. But undeterred, Wall Street analysts, when averaged, believe it could be worth $302.63 per share, according to TipRanks, compared to where it trades right now at $193.45.
Fortunately for Atlassian, its workplace-management software remains in higher demand, in part due to workforces being scattered during the pandemic lockdowns. The company is seizing the opportunity and is a high-revenue-growth business -- trailing-12-month revenue almost doubled in just the past three years. And this stellar growth is something several analysts cited in issuing their bullish price targets.
TEAM revenue (TTM) data by YCharts. TTM = trailing 12 months.
Investors can expect high revenue growth. Not only is Atlassian winning new customers, but Mizuho analyst Gregg Moskowitz also notes that the company just raised prices for its software. And the higher monetization of its customer base is one of the reasons the analyst believes it's a stock to buy, with a price target of $320 per share, according to The Fly.
Within the next several years, Atlassian's management is aiming to generate $10 billion in revenue annually compared to $2.8 billion over the past year. The company will try to kick off its fiscal 2023 on a high note when it reports first-quarter results on Thursday, Nov. 3.
Upstart: Implied upside of 9.8%
Wall Street isn't bullish on every beaten-down tech stock, as evidenced by Upstart. Shares currently trade at $22.27, and analysts have an average price target of only $24.45, suggesting a one-year upside of only about 9.8%, according to TipRanks. And whereas most analysts agree that DigitalOcean and Atlassian are buying opportunities, few would recommend buying Upstart. Roughly half of those surveyed recommend simply holding.
Upstart partners with financial institutions and brings them a steady flow of consumers looking for personal and automotive loans. These consumers are run through the company's artificial intelligence (AI) software, trying to accurately measure risk and provide instant approvals. The problem of late is getting Upstart loans funded by institutional investors.
Management is trying to solve this problem by finding partners willing to reliably commit money for funding its loans. It even said that this is a "transitional period" for this reason. However, Morgan Stanley analyst James Faucette said he believes this will make Upstart's business grow slower and with less-attractive profit margins. And it's partly why Faucette has a paltry price target of just $15 per share, according to The Fly.
While in this transitional period, Upstart is providing some of the funding for its loans by using resources on its balance sheet, something analysts are not keen about. For example, Atlantic Equities analyst Simon Clinch essentially says Upstart's management is breaking its promises to investors by using its balance sheet to fund loans. And for this reason, Clinch believes Upstart stock has downside potential and gave it a price target of just $22 per share, according to The Fly.
The good news for shareholders is that the company's problems are related to the economy. By contrast, its AI software isn't in question. That could mean that Upstart will keep seeing more adoption by financial institutions as they move away from using credit scores alone. If that happens, Upstart could be in for far more than 9.8% upside when the credit cycle improves down the road.
The stock to buy today
Upstart might be the cheapest of these three stocks, and Wall Street thinks Atlassian has the most upside. But for me, DigitalOcean is the stock I would buy today if forced to pick only one of these three. The company's market is large and growing and its revenue is surging accordingly. Even if macroeconomic conditions hamper growth in the near term, the opportunity appears quite large.
Moreover, DigitalOcean's rising profitability puts it in rare company among smaller technology companies, a trait I find valuable in an investment. I'm not sure if the stock has 44% upside in the coming year. But over the course of the next five years, I fully expect it to beat the average returns of the stock market.
