Buy/Sell: Wall Street’s top 10 stock calls this week

What has Wall Street been buzzing about this week? Here are the top 5 Buy calls and the top 5 Sell calls made by Wall Street’s best analysts during the week of October 16-20.
 
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Top 5 Buy Calls:

1. Netflix upgraded at Morgan Stanley with revenue growth set to accelerate

Morgan Stanley upgraded Netflix (NFLX)to Overweight from Equal Weight with a price target of $475, up from $430, noting that its prior view was based on concerns that consensus expectations for Netflix’s new growth drivers – paid sharing and advertising – were too high. Since hitting $475 when the company reported Q2 results in July, both those estimates and valuation have come down and sentiment around the advertising opportunity, in particular, have soured, notes the firm. “Against this rising anxiety and falling stock price,” the business has been accelerating, the password crackdown is working, and the competition has pulled back, Morgan Stanley said following the company’s Q3 report. The firm now believes Netflix will deliver the objectives it set out a year ago, accelerate revenue growth back to double digits and expand margins.

KeyBanc also upgraded Netflix to Overweight from Sector Weight with a $510 price target following the Q3 report. The company is entering 2024 “a cleaner story” as paid sharing appears to have changed Netflix’s ability to reach the next 250M subscribers, operating profit and free cash flow are steadily ramping; and buybacks should support a 25%-plus earnings growth profile, KeyBanc tells investors in a research note. The firm now feels better that paid sharing will likely benefit subs into 2024.

2. Microsoft initiated with a Buy at Loop Capital

Loop Capital initiated coverage of Microsoft (MSFT) with a Buy rating and $425 price target. The company’s growth is set to accelerate driven by its two most strategic businesses, Azure and generative artificial intelligence products, Loop tells investors in a research note. The firm says Microsoft has positioned itself to benefit from both large enterprises who prefer to “buy” pre-packaged GenAI solutions and independent software vendors who are currently building out their GenAI packaged solutions using Azure OpenAI Services.

3. Starbucks initiated with a Buy at Deutsche Bank

Deutsche Bank initiated coverage of Starbucks (SBUX) with a Buy rating and $118 price target. The firm believes Starbucks is well positioned to deliver on its 15%-20% earnings growth algorithm. While Deutsche recognizes concerns that Starbucks’ sales guidance is ambitious, it believes 7%-9% same-store-sales could provide margin opportunity above what is embedded in the guide, and thus sees 15%-20% earnings growth “as sufficiently achievable.” The firm views Starbucks as one of the highest quality growth companies in restaurants and sees a favorable risk/reward at current share levels.

4. Chipotle initiated with a Buy at Deutsche Bank

Deutsche Bank initiated coverage of Chipotle (CMG) with a Buy rating and $2,375 price target. Chipotle is “a rare compounding growth story,” well positioned for sustainable mid-single digit plus growth in same-store sales, unit growth acceleration and margin expansion, the firm tells investors. Given the belief that the company’s multi-faceted sales strategy will drive continued positive traffic and increasing visibility to the path to high-20% restaurant margins, Deutsche thinks the shares offer “a favorable risk/reward,” the analyst added.

5. Arm initiated with an Overweight at KeyBanc

KeyBanc initiated coverage of Arm (ARM) with an Overweight rating and $65 price target. The firm believes Arm will increasingly benefit from key semiconductor design trends, including rising chip complexity, as evolving compute chip architectures increasingly compensate for scaling challenges as a result of the demise of Moore’s Law. The company stands to benefit as computing requirements across mobile, data center, auto, and internet of things become increasingly more demanding and complex, KeyBanc tells investors in a research note.

Top 5 Sell Calls:

1. Foot Locker downgraded to Sell at Goldman Sachs

Goldman Sachs downgraded Foot Locker (FL) to Sell from Neutral with an $18 price target. The repositioning of the Champs Sports brand will likely continue to weigh on the comp and Foot Locker’s market share position will be difficult to stabilize following the Nike allocation changes, the firm tells investors in a research note. Goldman says there is potential for downside to current valuation.

2. Peloton downgraded to Underperform at BofA on increasing churn risk

BofA downgraded Peloton (PTON) to Underperform from Neutral with a price target of $4.15, down from $6.50. The current share price does not reflect risk to revenue from increased churn, the analyst tells investors. The firm, which believes “cracks are forming in Peloton’s ability to grow subscribers,” argues that initiatives are not moving the needle and notes that its 2024 and 2025 revenue estimates are 6% and 14% below the Street views, respectively.

3. Chewy reinstated with an Underperform at BofA

BofA reinstated coverage of Chewy (CHWY) with an Underperform rating and $16 price target. The firm says weakening pet e-commerce fundamentals are pressuring the company’s revenue growth and margin expansion. This will continue to weigh on Chewy’s valuation, BofA tells investors in a research note. The firm believes a significant decline in pet adoptions, inflation and trade down activity are impacting pet industry trends.

4. Wells Fargo double downgrades Graphic Packaging to Underweight

Wells Fargo double downgraded Graphic Packaging (GPK) to Underweight from Overweight with a price target of $19, down from $26, given the firm’s view that sustained food/beverage inflation and emergent GLP adoption could pressure already weakened boxboard fundamentals. Foreign producers are targeting the U.S. boxboard, further pressuring supply/demand, Wells adds. Given the firm’s cautious outlook on boxboard fundamentals, Wells is also lowering its 2024 EBITDA estimate to $1.70B.

5. Citi downgrades SunPower to Sell on expected estimate cuts

Citi downgraded SunPower (SPWR) to Sell from Neutral with a price target of $4.50, down from $10. The firm expects residential solar to have “another tough quarter” and sees risk to the guidance from SunPower. While SunPower is a “crowded short,” there is room for downside as forward estimates need to come down, Citi tells investors in a research note. The firm says the company’s’ strategic initiatives will take time to implement, its market share could be at risk, and liquidity remains tight.

Morgan Stanley also downgraded SunPower to Underweight from Equal Weight with a price target of $5, down from $8. While bullish on the long-term prospects for residential solar, the firm downgraded SunPower on “several near-term dynamics.” These include growth headwinds arising from eroding demand in certain pockets of the U.S. and a slower than expected recovery in California post-NEM 3.0, Morgan Stanley tells investors in a research note. The firm sees considerable downside to consensus adjusted EBITDA estimates in 2024 and 2025 as well as a potential capital raise to maintain minimum required liquidity levels.