Investors looking for growth stocks that can make dramatic moves to the upside want to focus on the healthcare and finance sectors. These two stocks tumbled during the week ended Feb. 9 even though the Wall Street analysts who follow them closely think the opposite should be happening.
The price targets that analysts set for these two stocks imply gains of 33% and 45% once the rest of the market comes around to their way of thinking.
Before you open the brokerage app on your phone to pound the buy button, it’s important to realize that Wall Street analysts who set high price targets can quietly lower them if things don’t work out. Repairing the damage a bad call can inflict on your portfolio isn’t as easy.
Here’s a closer look at the road ahead of these stocks to see if they’re as attractive as enthusiastic analysts say they are.
Shares of DexCom (DXCM -1.70%) fell a few percentage points in the days after it reported arguably positive results from the fourth quarter of 2023. Sales of continuous blood glucose monitors (CGMs) the company sells to patients with diabetes are rising much faster than expenses.
In Q4 2023, earnings soared 179% to $0.67 per share. This could be another big year. Management is forecasting a revenue gain of 16% to 21% in 2024.
Rising CGM sales inspired TD Cowen to raise its price target on DexCom to $160, which implies a 33% gain over the next 12 months. The company is still rolling out its next-generation device, the G7, in the U.S. market.
More than one in 10 American adults have diabetes, which means DexCom’s addressable market is huge. Unfortunately, investors who buy at recent prices need this business to keep growing at a rapid pace for years to come, or they could suffer heavy losses.
DexCom shares have been trading for a sky-high valuation of around 69 times this year’s earnings expectations. While there’s a chance the business can grow into its lofty valuation, this stock is too risky for most investors right now.
Bill (BILL 0.79%) is another growth stock that fell last week despite an encouraging earnings report and increasing expectations from investment bank analysts. The stock finished the week ended Feb. 9 down about 17% even though an Oppenheimer analyst raised their target on the stock to $95, which implies a gain of about 45% from recent prices.
Small, medium, and even larger businesses hire Bill to automate the way they manage payments and expenses. Fear of a recession kept many businesses from increasing their budget for online services last year, but Bill kept attracting new customers. The company served 473,500 clients at the end of December, which was 8.7% more than a year earlier.
Bill isn’t just signing up heaps of new customers. Existing clients are increasing utilization. The company processed $75 billion worth of payments during the last three months of 2023, which was 11% more than a year earlier.
Bill’s client list could get much bigger once the macroeconomic environment improves. There are still millions of small businesses that rely entirely on manual processes and paper checks.
Bill isn’t reporting net income according to generally accepted accounting principles (GAAP) yet, but its business is increasingly profitable. Free cash flow during the last six months of 2023 more than doubled year over year to $122 million.
At recent prices, you can scoop up shares of Bill for about 32 times trailing free cash flow. That’s a great price for a company growing at Bill’s present pace. Adding some shares of this stock to a diversified portfolio looks like a smart move to make right now.
Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bill Holdings. The Motley Fool recommends DexCom. The Motley Fool has a disclosure policy.