Analyst price targets often change as new data changes their projections. The danger in relying on price targets is that the analysis they are based on can become outdated. When the market leads to a steep drop in a stock's price, it can appear to have lots of upside because those price targets have yet to be updated to reflect the new change catalyst. Buying solely on a price target can end up being a costly assumption.
Three stocks with potentially overly optimistic price targets from analysts at the moment are Walgreens Boots Alliance (WBA 0.57%), Rivian Automotive (RIVN 6.10%), and United Airlines Holdings (UAL -1.25%). Let's see why these three stocks are overdue for analyst downgrades.
1. Walgreens Boots Alliance
Pharmacy retailer Walgreens Boots Alliance is struggling with profitability, its dividend yield is incredibly high at 8.75%, and the company is also balancing a growth strategy in launching primary clinics. Those are a lot of balls in the air that the company needs to juggle, and it isn't doing a great job of that right now.
Analyst price targets don't appear to reflect that, either. The consensus price target is over $33 and suggests that in the near term (price targets are normally set for the next 12 months or so), the healthcare stock has an upside of around 50%. A lot would need to go right for the stock to deliver those kinds of returns for investors.
Investors should instead brace for more downgrades because Walgreens incurred a loss of $208 million last quarter (for the period ended Aug. 31). While that was technically an improvement from the $501 million loss it incurred in the same period last year, it's not going to inspire too much confidence in investors. The company is also in the midst of changing CEOs, which adds even more uncertainty into the mix.
Ultimately, there's not much of a reason to be bullish on Walgreens' prospects right now. The business needs a lot of work, and it would be surprising if analysts don't drastically lower their price targets soon. Walgreens is a risky stock, and it's not worth taking a chance on it right now given all that's going on with the business.
2. Rivian Automotive
According to Wall Street, electronic vehicle (EV) maker Rivian has even more upside, potentially rising by 70% in value. The company is on track to produce 52,000 vehicles this year and its third-quarter deliveries of 15,564 were higher than analyst expectations of 14,000, suggesting that the company will have a better-than-expected quarter when it reports earnings next month.
The problem is that while that might mean strong sales, the bottom line is sure to be firmly in the red. Rivian has reported a net loss of more than $1 billion in each of the past four quarters and that wouldn't be an easy trend to change anytime soon.
And in the longer run, poor economic conditions may hinder demand. Tesla CEO Elon Musk warned recently that "people hesitate to buy a new car if there's uncertainty in the economy." And high-priced EVs, such as those from Rivian, aren't any easier to afford.
Rivian's business is growing but that's not likely going to be enough to turn things around for the EV stock, which is down 7% this year. And over the past 12 months, it has cratered 47%. Although it is hitting production targets, investors also care about profits. And until there's a significant improvement on the bottom line, it could prove to be difficult to get investors bullish on Rivian again.
This is another stock that analysts should soon lower their price targets on. Rivian still has a long way to go in proving it can be profitable, and until that happens, investors are better off avoiding the stock.
3. United Airlines
United Airlines may be the best-run business on this list, but I have a hard time believing that it will rise 82% over the course of the next year or so, as analyst price targets would have you expect.
It has been a mediocre year for airline stocks with the share prices of United down 6%. Oil prices are higher due to conflicts in multiple parts of the world, and that's a trend that may remain in place for the foreseeable future. That means worse earnings numbers for airlines.
And data from Morning Consult on travel and hospitality indicates that demand for leisure travel is also beginning to slow down. Although the airline has reported a profit in four of the past five quarters, the one-two punch of lower demand and higher fuel costs could put a dent in its earnings.
Unless things change drastically and a recession doesn't happen, it's unlikely that United's stock will rally as much as Wall Street's consensus price target implies. But if you're willing to buy and hold, this could still be a good investment to hang on to for the long haul.
