Stock Market

Which Growth Stock Looks Most Promising Despite Near-Term Headwinds?

The shift to safer bets amid high inflation and other macro challenges significantly pulled down several growth stocks this year. Most of these growth stocks were trading at sky-high valuations after gaining immensely from pandemic-induced tailwinds. Just when several analysts felt that growth stocks had bottomed out and were poised to rebound, Federal Reserve Chair Jerome Powell’s gave a speech at the Jackson Hole symposium. His speech raised concerns about the fate of growth stocks in the near term. Powell’s comments made it clear that the Fed would aggressively hike interest rates to tame inflation.

The Fed’s measures to tackle inflation might push the U.S. economy into a recession. Nonetheless, some investors are looking beyond the turmoil to pick growth stocks that are trading at attractive valuations and have lucrative long-term growth potential.

Using the TipRanks Stock Comparison tool, I placed the following stocks against each other to pick the growth stock that Wall Street is most bullish about despite macro challenges.

SHOP Shopify $30.69
TDOC Teladoc Health $30.26
SQ Square $66.79

Shopify (SHOP)

Shopify (SHOP) on the phone display.

Source: Burdun Iliya / Shutterstock.com

Shopify (NYSE:SHOP), which enables merchants to set up an online store, benefited from accelerated e-commerce adoption in the early days of the Covid-19 pandemic. However, a slowdown in e-commerce trends after the economy’s reopening and the impact of inflation on consumer spending hurt Shopify’s performance over recent quarters.

Shopify posted an adjusted loss per share of 3 cents in the second quarter of 2022. Its revenue grew 16% to $1.3 billion, reflecting a deceleration compared to the 22% growth in the first quarter. Given the persistent headwinds, Shopify expects to post an adjusted operating loss in the second half of the year.

However, the company continues to invest in tools that would attract more merchants to its platform over the long term. This includes the Shopify Fulfillment Network (SFN), Shopify Payments, Shopify Editions and Shopify Markets.

Recently, Atlantic Equities analyst Kunaal Malde upgraded Shopify stock to a “buy” from a “hold” with a price target of $46. Malde believes that Shopify’s market-leading product innovation will help it gain additional share of e-commerce volumes. It will also help in enhancing the company’s take rate.

Malde added, “GMV estimates are now seemingly more conservative for Shopify than most peers, so we now see upside to consensus following the recent reset. Valuation remains relatively high but no longer assumes success of SFN, in our view.”

Overall, Wall Street analysts are cautiously optimistic on Shopify stock. The stock has a “moderate buy” consensus rating based on 12 “buys” and 14 “holds.” The average price target of $43.02 for SHOP stock implies 37.6% upside potential from current levels.

Teladoc Health (TDOC)

The Teladoc logo through a magnifying glass.

Source: Postmodern Studio / Shutterstock.com

Teladoc Health (NYSE:TDOC) gained from the demand for virtual healthcare amid pandemic-induced mobility restrictions and lockdowns. However, dismal performance following the reopening of the economy has raised concerns about the company’s path to profitability.

Despite tough year-over-year comparisons, Teladoc’s Q2 revenue increased 18% to $592.4 million and beat analysts’ expectations. However, investors were spooked by a $3 billion goodwill impairment charge in Q2. That’s on top of the $6.6 impairment charge booked in the first quarter.

Teladoc’s Q2 performance triggered rating downgrades by several analysts. Most recently, Guggenheim analyst Sandy Draper downgraded TDOC stock to a “sell” from “hold.” Draper believes that Teladoc’s top line will remain under pressure due to multiple factors, including a tough macro backdrop that is “elongating sales cycles in enterprise decisions.”

In contrast, D.A. Davidson analyst Robert Simmons initiated coverage on Teladoc stock with a “buy” rating and a price target of $45. Explaining his bullish stance, Simmons stated, “We believe Teladoc has established itself as the leader in telehealth, with operational scale and a completeness of offerings that allow it to offer differentiated service to customers.”

Despite certain regulatory barriers, Simmons is optimistic about further penetration of telehealth, which bodes well for Teladoc.

All in all, analysts are sidelined on Teladoc stock, with a “hold” consensus rating based on five “buys,” 15 “holds” and one “sell” recommendation. At $38.22, Teladoc’s average price target implies 24.1% upside potential from current levels.

Block (SQ)

Block logo over a background with former square logo. SQ stock.

Source: Sergei Elagin / Shutterstock

Block (NYSE:SQ) stock has declined significantly this year as investors are concerned about the impact of a potential recession on the financial technology (fintech) firm’s performance. The company’s results in the first half of this year were adversely impacted by a notable slump in Bitcoin (BTC-USD) revenues.

Block’s second-quarter revenue declined 6% to $4.4 billion and adjusted earnings per share (EPS) fell 63% to 18 cents. The company’s top line was impacted by a 34% decline in Bitcoin revenue amid the so-called crypto winter. Block recorded a $36 million Bitcoin impairment loss in the quarter. Meanwhile, gross payment volume (GPV) grew nearly 23% to $52.5 billion.

Block has scaled back its planned investments for 2022 by $250 million amid tough business conditions. That said, the company continues to believe in further expansion of its Square and Cash App ecosystems along with the strong growth potential for Afterpay’s (acquired earlier this year) buy now, pay later platform.

BTIG analyst Mark Palmer is optimistic about Block’s long-term prospects and reiterated a “buy” rating, with a price target of $175 following the Q2 results. Palmer believes that the accelerated adoption of the Cash App ecosystem (Block’s peer-to-peer payments system, which also includes Bitcoin revenues) amid the pandemic was a “game-changer for the company.”

Palmer also highlighted the continued growth of the Square ecosystem (the seller or merchant side of Block’s business) in the domestic market and its attractive prospects in international markets. Indeed, Block is focused on boosting the footprint of its Square ecosystem. It launched 44 products across international markets in the first half of this year.

Overall, Block scores a “strong buy” consensus rating based on 26 “buys,” six “holds” and one “sell” recommendation. The average price target of $112.97 implies 68.2% upside potential.

To conclude, analysts are treading cautiously with regard to Shopify amid a slowdown in e-commerce trends and consumer spending. Meanwhile, Wall Street is on the sidelines when it comes to Teladoc stock due to near-term headwinds. However, most of the analysts covering Block are optimistic about the company’s long-term prospects in the fintech space. Analysts estimate a higher upside potential in SQ stock compared to the other two growth stocks.

On the date of publication, Sirisha Bhogaraju did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Sirisha Bhogaraju has over 15 years of experience in financial research. She has written in-depth research reports and covered companies across various sectors, with a primary focus on the consumer sector. Sirisha has a master’s degree in finance.

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