This Just In: Upgrades and Downgrades

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.

And speaking of the best ...
As markets turned green yesterday, Akamai (Nasdaq: AKAM  ) headed the other way. Shares of the Motley Fool Rule Breakers pick tumbled about 2% in response to a half-hearted downgrade to "hold" from Citigroup.

Half-hearted?
Sure. I mean, the analyst didn't exactly pan the stock. To the contrary, Citi praised Akamai as "an expanding revenue opportunity driven by broadband growth meeting online advertising, rich media, and e-commerce, a best-in-class differentiated product set, and strong fundamentals with future growth potential in international markets."

Although Citi sees risks in "increased competition" and "uncertain demand outlook for customers engaged in emerging business models like Web 2.0, social networking, and software-as-a-service," the analyst nonetheless insists that Akamai remains "a core Internet stock." It's just that with Akamai now trading near Citi's price target, the analyst believes that investors are better off "holding" the stock and waiting for better prices before buying more.

Let's go to the tape
So let's see how well Citi has been doing with its predictions in "online advertising, rich media, and e-commerce" and "social networking and software-as-a-service."

Company

Citi Said:

CAPS Says (out of 5):

Citi's Pick Beating S&P By:

Baidu.com (Nasdaq: BIDU  )

Outperform

***

77 points

Capella Education

(Nasdaq: CPLA  )

Outperform

****

36 points

Salesforce.com

(NYSE: CRM  )

Outperform

*

29 points

Citi's not bad, but neither is it perfect. Before you get too worried about this latest Akamai downgrade, take a gander at how Citi's been doing on a few other predictions -- including two sells in this space:

Company

Citi Said:

CAPS Says (out of 5):

Citi's Pick Lagging S&P By:

Yahoo! (Nasdaq: YHOO  )

Underperform

**

23 points

Netease.com  (Nasdaq: NTES  )

Underperform

*****

26 points

Riverbed Technology

(Nasdaq: RVBD  )

Outperform

****

52 points

Still, according to CAPS, Citi's right a bit more often than it's wrong. And the divergence you see between the goodness of its correct predictions and the badness of its gaffes shows up in CAPS, where the analyst ranks in the top 20% of investors. This showing suggests to me that Citi's caution on Akamai is well-founded. And the more I look at the numbers, the more I agree: Akamai is just too expensive to buy today.

Mind you, it's not the company's sky-high price-to-earnings ratio of 61 that scares me, or at least, not just that. When you value the company on its free cash flow, Akamai looks a lot cheaper. The price-to-free cash flow ratio works out to 34. But even that ratio looks expensive relative to the company's projected 25% rate of annual profits growth.

Foolish takeaway
According to Citi, Akamai won't be a buy again until the shares are trading closer to $35. But I think the stock would still be only fairly priced at those levels. I not only agree with Citi's downgrade, but I'd go a step further and sell the stock today.

Fools of a feather rarely fly together. If you check out our Rule Breakers newsletter service, you'll find out why our team disagrees with both Citi and Rich. Sign up for a free trial to read the details.

Fool contributor Rich Smith does not own shares of any company named above. Netease.com, Baidu.com, and Akamai are all Rule Breakers recommendations. You can find Rich on CAPS, publicly pontificating under the handle TMFDitty, where he's ranked No. 2,115 out of more than 105,000 players. The Fool has a disclosure policy.


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