At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
Through the looking glass
Down is up and up is down today, as Wall Street megabanker Citigroup started off the trading week with a quick reversal of its November downgrade on Amazon.com (Nasdaq: AMZN ) . "How We Could Be Upgrading [Amazon] Here?" Citigroup asked rhetorically -- then admitted that "given that we downgraded [Amazon] on recession risk at $52 [back in November], this call should be treated skeptically."
Do tell
Why might you be skeptical of Citi? Let me count the ways. On Amazon in particular, the analyst has made two affirmative predictions over the past two years; each ended in disaster. Advising that investors sell the stock in January 2007, Citi was stunned to see the stock outperform the market by 33 points over the next three months (at which point Citi caved and upgraded the stock to neutral.) One year later, Citi tried its luck again, in January '08 -- this time betting on the upside, and losing 13 more points to the market, as Amazon shed nearly half its market cap over 10 painful months.
And now Citi has the gall to once again try to give us advice on Amazon.com, after leading us astray so often?
And yet...
Listen, Fools -- I've got precious little respect for Citi as a stockpicker generally, and on Amazon in particular. But I'm on record myself in favor of the stock. So before throwing out the river water with the baby today, allow me to argue a few points in Amazon's favor.
First, there's the valuation. With an enterprise value of 22 times its trailing free cash flow and with growth postulated at 22% long-term, Amazon may not be a screaming bargain -- but I'd argue it is no worse than fairly valued today. Second, Citi makes the case that Amazon could grow even faster than most people expect. According to the analyst:
- Evidence of less discounting, better marketing return on investment, lower search ad cost per click, and increased fulfillment efficiencies -- all suggest that Amazon could improve its operating profit margin faster than currently expected.
- International sales, expanded use of Amazon Prime, and "remarkable quick adoption" of Kindle all point to rapid growth in revenue.
- If, as Citi predicts, Amazon grows its revenues twice as fast as Google (Nasdaq: GOOG ) , and at rates "vastly superior" to what eBay (Nasdaq: EBAY ) and Yahoo (Nasdaq: YHOO ) are reporting, this could spur demand among best-of-breed investors, who seek to own the stocks that are "working" regardless of valuation.
But what about Citi's record?
As for Citi itself -- it's true that the analyst's long-term record is in tatters. But Citi has been working hard at redeeming its rep. It's gotten many more picks right than wrong over the past three months, and so far is beating the market on more than 70% of its April picks. For example:
|
Stock
|
Citi says:
|
CAPS says:
|
Citi's Pick Beating S&P By:
|
|
Archer Daniels Midland (NYSE: ADM )
|
Underperform
|
***
|
8 points
|
|
Schwab (Nasdaq: SCHW )
|
Outperform
|
****
|
14 points
|
|
MGM (NYSE: MGM )
|
Underperform
|
**
|
33 points
|
Third time's the charm
Will today's upgrade of Amazon keep the momentum moving in Citi's favor? Or will it wash out for its third time in a row?
Personally, I'm a wee bit skeptical on Citi's thesis, based on the fact that, while Amazon doesn't look horribly over-valued to me, neither is it an obvious bargain. But who cares what I think? What we'd really like to find out is your opinion of Amazon.com.
Click on over to Motley Fool CAPS now, and tell us what you think.
RSS Headlines
Fool UK