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 track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the worst ...
With its reputation in the toilet, and the numbers finally confirming it, does anyone still care what Goldman Sachs says? Apparently, it doesn't matter if you don't. As this week's cavalcade of new stock ratings demonstrates, Goldman's not about to shut up. On Wednesday, ahead of the second-quarter earnings season start-up, the megabanker with the mini-morals issued a whole slew of revisions to its ratings in the software space.
A choice few for your perusal:
-
VMware
(NYSE: VMW) , which Goldman notes is about to enter its "first wave of enterprise license agreement renewals" while facing "little inroads" from competitors. -
Oracle
(Nasdaq: ORCL) , said to hold a "dominant" market position and "strong EPS protection." -
Adobe
(Nasdaq: ADBE) , cut by a downgrade and reduced price target, but still undervalued. -
Microsoft
(Nasdaq: MSFT) , selling for a "low multiple." -
salesforce.com
(NYSE: CRM) and Akamai(Nasdaq: AKAM) , two names Goldman likes in the event we avoid a double-dip recession, and instead face the less frightening prospect of mere "slowing economic growth."
Last but not least, Goldman likes Nuance Communications
Why Nuance? Why now?
Why are we discussing Nuance, when so many higher-profile names fill out Goldman's list? Everybody talks about Microsoft, Oracle, Adobe, and all the rest. (Even us. Fact is, each and every stock named above has been recommended by one Fool newsletter or another.)
In contrast, Nuance Communications gets precious little electronic ink. It's time we changed that. It's time we checked back in on this long-standing Motley Fool Hidden Gems recommendation, and consider whether Goldman's right about it being time to re-up on the stock.
Goldman's guess
Goldman believes it is, of course, and here's why. Goldman predicts Nuance will out-earn expectations in each of fiscal years 2010, 2011, and 2012. Noting that most software companies sell for about a 16-times multiple to forward earnings, Goldman points out that at $15 a share or so, Nuance fetches only about 11 times its earnings estimate for next year -- a significant discount to the norm.
Problem is, I'm not quite sure who Goldman's talking about when it says 16 times earnings is the normal price for software companies. Fact is, 'most anywhere I look, software shops sell for about Nuance's own 11-times valuation (Oracle) -- give (Adobe) or take (Microsoft) a couple of points of earnings-multiple.
It seems to me, in order to posit a 16 multiple as the "median" for the software group, Goldman has to rely heavily on such valuation outliers as Akamai, VMware, and salesforce, with their earnings multiples of 26, 44, and 59, respectively.
Foolish takeaway
Suffice it to say: I think Goldman's reaching a bit when it uses "nosebleed" valuations like those above to justify overpaying for Nuance. Far from selling at a 50% discount to any run-of-the-mill software company, it looks to me like Nuance sits right there in the middle of the pack.
Worse, when I apply my usual valuation technique on the company, I still find Nuance lacking as a value candidate. While the company's consistent production of free cash flow ($234 million over the past 12 months) is admirable, it's only enough to bring the valuation down to about 19 times annual free cash flow. On a dividend-less, 15% grower like Nuance, this looks like a reasonable price to pay -- but certainly no great big, screaming bargain of the type Goldman seems to see.
So while I'm certain the crew at Hidden Gems appreciates the vote of confidence, I personally am going to have to decline Goldman's invitation to buy Nuance. Much as I love the company and its whole idea of making speech and text interchangeable, Fools know better than to pay too much for a good thing. Will you be buying Nuance at this price? Tell us why (or why not) on Motley Fool CAPS.
