In the highly competitive world of sell-side research, Wall Street analysts are usually known to cover stocks in detail in order to gain an edge. They know the good and bad about the companies in their coverage quite well. So when they set ambitious price targets, that is, price targets that translate to high upside from current stock prices, it's usually a good sign that there's plenty of potential for the underlying business to perform well over the near future. But sometimes, businesses face unanticipated changes in their operating environment that analysts either never factored in previously, nor had given due importance to in their analyses.
In such cases, price targets can remain elevated even when the underlying business has deteriorated. Here are three stocks that analysts on the Street still seem a bit too bullish about -- Plug Power (PLUG 1.26%), Ginkgo Bioworks (DNA 10.60%), and Medical Properties Trust (MPW -1.10%) -- but could be dead wrong. Despite promising projections, investors shouldn't expect great near-term returns from these stocks. Here's why.
1. Plug Power
Plug Power hasn't been a great buy this year. Shares of the company are down more than 40%. Plug Power makes hydrogen fuel cell systems, and many investors have gravitated to it as a potentially attractive renewable energy stock to own. But while hydrogen can help make for a greener world, whether it's a cost-effective solution is still debatable.
It's certainly not a lucrative business for Plug Power to be in right now -- that much is clear. As the business has grown over the years, so too have its losses. In 2022, revenue of $701 million was up 40%. The problem was that its net loss rose at an even faster rate of 57%, to $724 million. The company is still nowhere near profitability, and at a time when raising capital is more difficult than ever for businesses, investors have been staying away from the stock.
According to the consensus analyst price target of nearly $18, however, this should be a surefire investment that can easily double in value. Analysts have been trimming their price targets for the stock, but those downgrades may simply not be coming fast enough. This is a great example of where the price target looks dated. Investors could be taking on significant risks in assuming this stock will double within the next year or so.
Plug may turn out to be a good buy in the long run, but for now, with some atrocious financials, investors are better off staying on the sidelines and avoiding the stock.
2. Ginkgo Bioworks
Cell programming company Ginkgo Bioworks is comparable to Plug Power. Investors in the business are banking on a lot of future growth -- but the problem is that it may be decades away from being a reality. The company has no shortage of press releases announcing deals with healthcare companies and other businesses as it looks to transform industries. In August, it announced that it would be working with Alphabet's Google to make "AI tools for biology and biosecurity."
The problem here is that many of these deals could take years to develop and to result in revenue growth for Ginkgo. The company's sales through the first six months of the year are down around 50%, as Ginkgo has generated less revenue due to COVID testing, and other areas of its business are simply not growing fast enough.
And while its year-to-date loss of $378 million is down from the mammoth $1.3 billion loss Ginkgo incurred a year ago, it's indicative of the large obstacles the company is facing. Research and development expenses of $307 million through the first two quarters alone were enough to wipe out the top line.
Ginkgo's likely to remain an unprofitable, cash-burning machine for the foreseeable future. It's up around 6% this year, but if you believe analyst price targets, which suggest the price should be $3.75, then that would mean this is another stock that should double in value.
I wouldn't be as optimistic. While Ginkgo may help revolutionize healthcare and other industries, it first needs to prove it has a sustainable business -- it's not there yet, and it's not even close. This is a high-risk investment that isn't suitable for most investors.
3. Medical Properties Trust
Medical Properties Trust is a real estate investment trust (REIT), and it's the safest stock on this list. It isn't focused on some lofty growth targets. Instead, it just needs to collect rent from its tenants. While that's a relatively simple task, the risk relating to some of its tenants is what has made this a bad stock to own of late. Through the first six months of the year, its funds from operations have declined by 5% to just under $526 million. But with collection issues still a potential problem for the business, many investors remain hesitant to buy shares.
Earlier this year, the company announced it was slashing its quarterly dividend by nearly 50%, from $0.29 to $0.15. While it was an important move for the company to make to improve its financial situation, the dividend was undeniably a major reason investors bought shares of the REIT.
Year to date, the stock is now down around 50%. Medical Properties' rapidly declining valuation has more to do with the "upside" the stock has according to Wall Street than anything else, as this is by no means a growth stock.
Wall Street has been slashing its price targets for the stock, but according to the consensus price target of over $10, that's still close to double where the stock trades at today. For a volatile stock such as Medical Properties, a steep drop in value can make it appear as though it's a bargain buy, even when it's not.
Medical Properties might recover in value, but I wouldn't count on the massive returns that analyst estimates would suggest.
