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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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Jefferies floods the tubes
As we all know by now, the Internet is "a series of tubes." And this morning, investment banker Jefferies flooded those tubes with a raft of new buy ratings for some of our favorite Internet companies. In rapid succession, the analyst announced its predictions for winners and losers in the e-commerce sphere. Want to know which ones are which? Well, let's run down the list.
Two winners in social media
Right off the bat, Jefferies argues that two of the biggest names in social networking -- Facebook (NYSE: FB ) and LinkedIn (Nasdaq: LNKD ) -- are both "buys" for mom-and-pop investors. And while this may seem obvious (in retrospect) to LinkedIn shareholders, who've watched their stock gain 25% over the past 12 months, it probably comes as a surprise to anyone who's owned Facebook shares -- down more than 50% since their IPO.
Past performance, however, is the wrong way to look at Facebook, according to Jefferies: "With a potent mix of unprecedented scale, high engagement, and social + behavioral targeting, we think Facebook is must-buy media for marketers as they follow users online." If true, this argues strongly in favor of renewed revenue growth at the company going forward. As for profit growth, well, Jefferies hopes that "expansion into other business areas" will happen eventually, and says, "at the current price investors effectively receive this optionality for free."
Meanwhile, LinkedIn offers the chance for an even quicker profit, as the company "is likely to continue to perform in the near term ... taking market share as it provides the most differentiated, effective products out there." But not without risk. According to StreetInsider.com, Jefferies is now forecasting a $0.20 per share loss at LinkedIn this year, followed by profits next year barely half of what it previously expected -- just $0.44. Yet, the analyst tells investors to go ahead and buy LinkedIn, anyway.
And two more in e-commerce
Those are some interesting numbers, given that the consensus on Wall Street is still forecasting a $0.63 per share profit for LinkedIn this year, followed by $1.31 in 2013. But, whoever's numbers are right, one thing is clear: Jefferies sees nothing wrong with paying a triple -- near quadruple -- P/E for LinkedIn, in hopes of cashing in later on. Clearly, Jefferies likes LinkedIn a lot ... and it's not the only stock for which price is no object to this analyst.
Shifting now to the e-commerce space, another stock that got the analyst's stamp of approval is Amazon.com (Nasdaq: AMZN ) . Yesterday, as you may recall, investors applauded Amazon's move to ink a distribution deal for streaming movies with Epix. (Formerly an exclusive partner to Netflix (Nasdaq: NFLX ) -- and not coincidentally, Netflix is one name in e-commerce that Jefferies pointedly declined to endorse yesterday). But, according to Jefferies, there's a bigger reason to want to own Amazon, and that's the company's status as "one of the very few names in [e-commerce] that has proven its ability to deliver consistent growth while maintaining above-average CapEx spend" – which means that the stock's 300 times earnings valuation isn't too high a price to pay for this hyper growth stock.
Why not? Logically, if and when Amazon reaches a point where it's built itself up big enough that it can slack off on capex, free cash flow (and GAAP profits) should surge, shrinking Amazon's P/E in a jiffy. Many analysts agree this is how things will play out, with earnings surging more than 33% per year on average over the next five years. Whether even that is fast enough to justify a triple-digit P/E, however, remains open to debate. (For the record: I vote "no.")
Fortunately, even if you don't like its Amazon idea, Jefferies has another e-commerce name for your consideration: eBay (Nasdaq: EBAY ) . Here, the analyst sees two things to like. First, Jefferies argues that there's tremendous "upside potential from PayPal," and also from usage of the PayPal payment service on mobile devices. Second, Jefferies argues that eBay's succeeded in turning around its Marketplaces business, an accomplishment for which "the Street is not giving eBay enough credit."
Problem is, the converse is true: I'd argue that the Street is actually giving eBay too much credit for a supposed "turnaround" that, in all honesty, really isn't showing up in the numbers, yet. On its face, eBay looks overpriced at 17 times earnings, versus just 13% long-term growth estimates. In fact, though, the situation's worse than that. Over the past year, eBay's actually generated only about $1.9 billion in true free cash flow -- barely half of the $3.7 billion it claims to have "earned" under GAAP.
So, there you have it folks: Four hi-profile stocks that Jefferies likes a lot (and one more that it doesn't), their high share prices notwithstanding. Personally, I have to say that I'm leery of investing in any of them at today's valuations. I also have to say that when I check out Jefferies' track record on CAPS -- a record of just 46.5% accuracy on its picks -- that doesn't give me whole lot of confidence in the analyst's recommendations either.
Sure, overly optimistic stock prices don't faze this analyst. But, then again, it's not Jefferies' money at stake when you buy a stock on their say-so. My advice: Before taking their advice, get a second opinion. Read our premium stock reports on: