Overhyped stock picks can be tough to spot because people can get caught up in the possibilities.
Let’s face it, Wall Street analysts can get a bit exuberant with their forecasts. They love drawing straight lines that rise ever higher. Just look at the estimates assigned for any new, trendy industry.
The same goes with analyst price targets. The breathless assertion that a stock will go to the moon seems better suited for some Reddit chatroom than the tony offices of a supposedly sober Wall Street firm. Yet here we are with some of the most overhyped stock picks on the market.
Based on analyst assumptions, the following seven companies are set to rocket higher over the next year. It seems a tall order. Investors putting their money on the line should reset their expectations much lower with these overhyped stock picks.
Caution is warranted when it comes to overhyped stock picks. Investing should be about the long term growth of a business, not how high a stock can go in the space of just a year.
Most of Wall Street seems to have a good grip on reality when it comes to Tesla (NASDAQ: TSLA). With shares trading at around $215 per share at the time of writing, the consensus one-year price target of $227 per share is not absurd. It’s a 5% gain.
To make sales numbers, Tesla is cutting car prices, which is hitting profits. Operating margins sank to 9.6% in the second quarter, down from 11.4% in the first, and 14.6% a year ago. Even on an adjusted basis EBITDA margins tumbled 370 basis points.
The electric car company also finds it necessary to advertise its cars now, something it never had to do before. That will be an additional expense.
Yet a few months ago Cathie Wood’s Ark Invest firm put a $2,000 per share target price on Tesla stock that still stands.
Admittedly, it was for the year 2027 not 12 months from now, but it seems absurd on its face considering the increased competition and growing issues facing the EV maker. By those lights, TSLA is definitely one of the more overhyped stock picks out there.
I don’t dislike PayPal (NASDAQ:PYPL) as an investment, quite the opposite. I think it could be a good, long-term pick for investors. But as I mentioned above, investors need to have the correct mindset when buying into a company.
PayPal’s stock is down 40% over the past year. Wall Street, though, has a consensus outlook for $92 per share, a 55% gain from its current $59 per share level. On the high side, though, one analyst sees the fintech stock surging 114% to $126 per share.
That seems a tad lofty. PayPal faces stiff and growing competition in the payments space. It needs to confront the challenge Apple (NASDAQ:AAPL) presents as Apple Pay becomes an increasingly accepted payment option at checkout. It also has to combat Block‘s (NYSE:SQ) Square and upstarts like Paysafe (NASDAQ:PSFE) that focuses on the entertainment and gaming industry.
So, although I like PayPal’s chances of maintaining its status as a premiere payments platform, I don’t expect it being a moonshot anytime soon, it’s one of the overhyped stock picks that you shouldn’t get too excited about.
Sea Ltd (SE)
Online gaming and shopping platform Sea Ltd (NYSE:SE) is another company analysts just can’t believe isn’t doing better.
It lost a third of its value after its recent earnings report, so price targets will likely be recalculated, but they were still fairly pie in the sky beforehand.
Wall Street was targeting a $77 per share level, which was about 38% above its close prior to earnings. The high end of $115 per share should have been a non-starter from the get-go.
The early gains from its IPO were a pandemic-driven boost it failed to maintain. Its popular Free Fire game lost momentum along with the rest of the video gaming market in a reopened economy.
Its Shopee online platform was expanded beyond its core Asian market into Latin America and ran into competition from Alibaba‘s (NYSE:BABA) Lazada and others.
Revenue in the second quarter only rose 5% to $3.1 billion, missing projections for $3.3 billion in sales. Its banking business is experiencing growing credit losses forcing it to increase its provision for losses by 37%.
That could threaten the entire segment if things turn south making this one of the overhyped stock picks to avoid.
Hope springs eternal at online luxury fashion platform Farfetch (NYSE:FTCH). The stock just collapsed 45% to $2.61 per share on a disastrous second quarter earnings report. Wall Street, however, has a consensus price target of almost $9 per share on the stock.
Certainly analysts will be revising their outlook soon enough, but even when Farfetch was trading at $4.76 per share, Wall Street was looking for the stock to almost double. And one cheeky analyst had a $20 price target, for a 320% gain. At today’s prices, it would need to rise 666% to achieve that price.
Farfetch is facing crumbling demand for luxury goods in the U.S. and China, its two biggest markets. The luxury fashion marketplace routinely loses money and in the second quarter was burning through cash.
Its debt levels are also growing. It has almost $1 billion outstanding, yet Wall Street just can’t take its rose-colored glasses off of this money-burning stock.
The consensus view of Macy’s (NYSE:M) is not radical, though perhaps a bit optimistic. The 27% growth Wall Street is baking into its $19 price target is arguably not unreasonable, but the doubling of the stock to $30 that one analyst forecasts is.
Macy’s lost a third of its value over the last six months. It will prove difficult to regain any momentum. From its peak in 2001, department store monthly revenue dropped from almost $20 billion to under $11 billion today. Certainly online shopping offset most of the decline, but that just means Macy’s is going to have a difficult time going forward.
Post-pandemic revenge shopping at brick-and-mortar retailers slowed online shopping’s advance for a bit, but e-commerce is growing once again.
To expect the venerable retailer to make a sharp U-turn in its fortunes is not a realistic outlook.
Music streaming platform Spotify (NYSE:SPOT) is another stock that doesn’t seem overpriced in relation to analyst consensus targets (25% upside is forecast), but at the high end Wall Street is surely running off the rails. Expecting it to rise nearly 90% is a stretch.
Spotify is up 67% year to date, though it had been higher before giving up a quarter of its value. Second quarter earnings failed to impress investors despite the streamer adding a record number of new users for the period.
The problem is Spotify always loses money. In its 17 years of operation, it’s rarely turned a profit. That was the case again this quarter where losses doubled from the year ago period. They also widened from the first quarter.
Operating costs are soaring, margins are worsening, and free cash flow is deteriorating rapidly. Management says it’s more disciplined in its spending, but until that actually begins to show up on the financial statements, it’s hard to see Spotify’s stock rallying so high.
Insurance underwriter Lemonade (NYSE:LMND) is different from its competition.
It uses artificial intelligence and data to determine risk and underwrite policies for renters, homeowners, and more recently, autos. It’s helped Lemonade grow quickly, similar to online lender Upstart (NASDAQ:UPST), which uses AI to vet borrowers.
Customer counts rose 21% in the second quarter to over one million while premiums in force surged 50% to $687 million. Yet its key differentiator, AI, doesn’t seem to give it any competitive advantages.
While loss ratios are declining over time, they still exceed the competition. For example, Lemonade’s loss ratio for homeowners insurance, excluding natural disasters, was 69%, far above the 47.7% Allstate (NYSE:ALL) reported.
It hasn’t reported auto loss ratios yet, but Lemonade says it “has not yet made material improvements.”
That suggests AI isn’t helping Lemonade do better than traditional underwriting. Upstart is having similar issues. And as Lemonade expands into new verticals, margins could worsen.
The insurer also trades at nearly three times sales whereas Allstate and much of the rest of the insurance industry trades at less than one. Growing its stock valuation further is going to prove difficult.
On the date of publication, Rich Duprey did not hold (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.