The Federal Reserve has finally made it clear: we’re going to enter a tighter monetary policy environment next year, as the central bank pares back easy money and starts raising interest rates. That’s the take from Fed chair Jay Powell’s statements this week. The chairman, speaking after the Open Market Committee meeting, made it clear that the central bank will wrap up its asset purchase program at double the pace previously expected, and will likely put in place at least one rate hike next year.
Rates have been held near zero since March of 2020, and that, combined with the Fed’s easy money policy has helped to keep the stock markets inflated. As the realization sank in that these supportive policies are ending, US stock markets started slipping.
Looking at the situation for Morgan Stanley, chief US equity strategist Mike Wilson believes that we’re in for a period of market instability, as investors and companies adapt to new conditions. While the outcome will likely bring higher productivity and more investment opportunities, that could take several years to emerge. In Wilson’s words, “That breeds higher uncertainty and dispersion, making stock picking more important than ever in the year ahead.”
Even though Morgan Stanley, and its strategists, are turning more cautious on the markets as we head into 2022, they are also pointing out stocks to buy. They are now taking a more selective look at the markets, to find the less-visible opportunities.
We’ve used the TipRanks database to pull up the details on two stocks that Morgan Stanley analysts have picked out as potential winners in the months ahead, as Fed’s policy shift kicks in. These stocks offer over 60% upside potential from current levels. Let’s see what else brought them to the analysts’ attention.
Qualtrics International (XM)
First up is Qualtrics, a leader in a growing digital niche, experience management, or XM. Experience management deals with data analysis, measuring the interactions a company has with just about everything, from employees to customers to service providers to the general public. Qualtrics specializes in this field, offering a cloud-based XM platform to customer base that currently includes over 13,000 major brands. The company works with big names like Uber and Hulu, Sony and Dell, Activision and Spotify. The company boasts a 633% return on investment (ROI) for its users, who number over 2 million in more than 100 countries.
Qualtrics has seen its revenues increase steadily over the past year, registering a sequential top-line gain in each of the last three quarters. The Q3 top line, at $271.6 million, was up 41% yoy, a gain driven by a 49% increase in subscription revenue.
The key points in the Q3 report, however, came with the forward guidance. For the upcoming Q4, the company raised its revenue guidance to the $296 million to $298 million range, well above the $263 million expected, and for the full-year 2021 management bumped guidance to $1.056 billion to $1.058 billion, above the consensus $1.01 billion.
In a recent move to expand services and consolidate market position, Qualtrics acquired the conversational analytics company Clarabridge earlier this year. The acquisition closed in October, as an all-stock deal worth $1.125 billion.
Even with the solid showing, XM shares are down sharply in recent months. The stock has lost 33% since the beginning of November.
This opens up the ‘attractive entry point’ seen by Morgan Stanley’s 5-star analyst Keith Weiss.
“[Qualtrics’] momentum today with 38% revenue CAGR 2018-2020 and consistent >120% NRR, highlights an attractive share gain opportunity in a largely greenfield market, strong competitive differentiation, and size of the current TAM (which we estimate to be >$45 billion)… With expansion of the solution portfolio both organically and through recent acquisitions… we see Qualtrics well positioned to better sustain growth and wear down the key investor bear case in 2022,” Weiss opined.
“On the back on slowing growth in 2H and a broader pullback in software, valuation is attractive,” Weiss summed up.
In line with his bullish stance, Weiss rates XM a Buy, and his $54 price target implies room for ~70% upside potential in the next 12 months. (To watch Weiss’ track record, click here)
Overall, Wall Street remains bullish on Qualtrics. Of the 14 recent analyst reviews, 11 are to Buy vs. 3 Holds, for a Strong Buy consensus rating. The shares are selling for $31.73 and the $53.77 average price target matches Weiss’. (See XM stock forecast on TipRanks)
Toast, Inc. (TOST)
The second stock we’ll look at is Toast, a software company focusing on the restaurant industry. The company provides restaurant management and point-of-sale systems through cloud-based software packages built around the popular Android OS.
The Massachusetts-based company has had some ups and downs in the news recently. On the positive side, the company held its IPO in September, and priced the offering well above the expected range. The company put 25 million shares on the market at $40, against an expected price range of $34 to $36 – a range that had itself been bumped up earlier from $30 to $33. The IPO raised $1 billion in gross capital, and Toast hit a market value of $19.9 billion.
Since then, however, the stock is down by ~45%. The fall came after the Q3 earnings report, the company’s first as a public entity, failed to impress investors. Revenues came in at $486.3 million, much stronger than the $430 million expected and driven by gains in the annual recurring run-rate of 77%, to reach $543.8 million. The company saw a 165% yoy gain in gross payment volume, to $16.5 billion, in a third strong result. At the same time, earnings fell, with the 90-cent per share loss coming in far deeper than the 27 cents expected.
Looking ahead, management guided toward a full-year top line of $1.655 billion to $1.685 billion; achieving this will bring 103% yoy revenue growth. But – the company still expects a steep operating loss, in the range of $36 million to $46 million.
Overall, investors are worried that the company exuberant IPO may have overvalued it when compared to the widening earnings losses.
Analyst Josh Baer lays out the Morgan Stanley outlook, taking a positive stance and writing: “The stock has pulled-back >50% from its high, with shares dropping 45% since its 3Q21 earnings release, just over a month ago, where the company beat consensus gross profit dollars by ~55%. We see this as a compelling opportunity to invest in a high quality, rapidly growing asset, addressing a large market, gaining share, with several powerful growth vectors to support durable growth and a conservative forward model well positioned for positive estimate revisions.”
In line with that upbeat outlook, Baer gives TOST shares an upgrade to an Overweight rating and a $53 price target. This figure would reflect gains of ~61% should the stock ultimately reach this target. (To watch Baer’s track record, click here)
Overall, there’s a positive feeling on Wall Street about TOST, along with some caution. The Moderate Buy consensus rating is based on 11 reviews that include 7 Buys and 4 Holds. The average price target of $60.11 suggests an upside of 82% from the current trading price of $32.85. (See TOST stock analysis)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.