Tuesday's Top Upgrades (and Downgrades)

This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines feature two downgrades at the intersection of tech and commerce, as both Amazon  (NASDAQ: AMZN  ) and Blue Nile (NASDAQ: NILE  ) get taken down a peg. On the plus side, though ...

Qiwi looks still sweet
The past week has not been kind to Qiwi (NASDAQ: QIWI  ) investors. Negative publicity surrounding all things "Russian" in the wake of the Malaysian Airlines Flight MH17 disaster has done a number on the former-Soviet bloc e-payments processor. Over the past five days, the shares are down 13%. And yet, according to one analyst, this lower price just makes the stock look that much more attractive.

A little over a week ago, analysts at Deutsche Bank said they foresaw Qiwi shares going to $60 over the course of the coming year, as the "Russian PayPal" surged 50% on the back of "the shift from offline retail sales and bank transactions to online payments and money transfers" in the Commonwealth of Independent States. In today's initiation at "positive," fellow banker Susquehanna International isn't quite that optimistic. But the analyst's projection of a $50 share price at Qiwi still promises new investors the chance to snag a 29% profit. Is that realistic?

I think so. Selling for 28.5 times earnings today, Qiwi is a bigger bargain than it appears. Free cash flow for the past year rings in at $133 million in FCF, according to S&P Capital IQ figures. That's more than twice the company's $63 million in reported net income, and gives the stock a very attractive price-to-free cash flow ratio of just 15 times.

While the shares are likely to remain volatile in the short term as they ride the rollercoaster of Russia-related headlines, long term, the stock's strong cash generation, cheap valuation, and 20% long-term-growth expectations suggest this stock is priced to outperform.

Amazon could dry up
Unfortunately, the same cannot be said about today's more famous tech-y ratings changes. Let's start with Amazon.

This morning, analysts at Citigroup cut their rating on Amazon to neutral and slashed their price target by $19, to $395 per share. Granted, that's still 9% more than the shares sell for today, but make no mistake -- this is a downgrade, not an upgrade. And Citigroup has serious concerns about where Amazon is heading.

Quoted on StreetInsider.com today, Citi analysts worry that "the significant AWS price cut on 4/1/14," which made Amazon's web-hosting services cheaper to its customers, was also "the primary cause of 2Q14 margins declining 50-150bp" for Amazon stock. While Citi has nothing but respect for Amazon's prowess as an e-tailer, therefore, the banker fears that "earnings and the stock could remain under pressure during this period of aggressive investment in AWS." This suggests that the company's rapid-fire growth rate, projected to average 35% annually over the next five years, may not meet expectations.

And given that the only possible explanation for Amazon sporting a P/E ratio of 564 times earnings is the fact that investors hope the company will grow into this valuation ... a risk to Amazon's growth rate is a very serious risk to Amazon's stock price as well.

Citigroup is right to downgrade it.

But Blue Nile could rise
Lastly, Blue Nile. One month ago, with Blue Nile shares selling for just under $28 apiece, analysts at Barrington Research opined that while the company is undeniably "a dominant online retailer of diamond engagement jewelry" and boasts "strong online engagement market share," the stock's growth rate (19%, projected) simply didn't measure up to its stock price. One month later ... William Blair agrees with Barrington. But could it be that these analysts are being overly pessimistic?

Downgrading the shares to "market perform" this morning, Blair appears to be looking at Blue Nile's new, lower stock price of $26 and change, and thinking, "Nope, still not cheap enough." And yet, when I look at the stock, I come to a different conclusion entirely.

Sure, priced at 30.5 times earnings today, Blue Nile shares look expensive. But analysts who follow the stock foresee long-term profits growth of nearly 19% annually. And between the cash Blue Nile is generating, and the cash it has already piled up in the bank, I think that's fast-enough growth to justify the valuation here.

Here's how the math works: Blue Nile currently sports a $317 million market cap. With more than $56 million in the bank, though, and no debt worth mentioning, the company's enterprise value drops to just $261 million. Meanwhile, free cash flow is pouring in the door at the rate of $18.8 million per year. Put all these numbers in a blender and mix well, and what you come up with is a stock selling for an enterprise value to free cash flow ratio of just 13.9 -- which seems to me a fine price to pay for 19% annual profits growth.

Long story short, even without a dividend to support it, I think this stock's a winner.


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