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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.
And speaking of the worst ...
A lot of Wall Street analysts woke up with egg on their face this morning, embarrassed by some pretty horrible numbers that one of their favorite stocks produced yesterday. Yes, indeed, Fools -- and as predicted -- robotic surgery specialist MAKO Surgical (Nasdaq: MAKO ) underperformed.
The numbers tell the tale: Sales came in light at $19.6 million. Earnings did, too, if you can call a $0.28-per-share loss "earnings" at all. Across the entire face of the globe, MAKO sold a grand total of six (count 'em, six) of its RIO surgical systems last quarter. That's roughly one sale every two weeks.
The bad news caught Wall Street unawares, and right now, analysts up and down the Street are windmilling backwards and walking back expectations for the stock:
- Canaccord Genuity: "Disappointing Q1/12 results" were "below our and consensus estimates." (Translation: See? We weren't the only ones who blew this call.)
- William Blair: MAKO is promising to sell as many as 58 RIO systems this year, but hitting this number will require "strong performance from Mako during the remainder of the year, which may prove challenging as the sales cycle appears to be showing only modest improvement."
- And most importantly, Mizuho Securities -- the same folks I criticized last month for pushing investors to buy the shares -- now laments that MAKO's new guidance could be "too high" and creates "a risk of further misses and/or guidance reductions."
Result: Both Blair and Mizuho have revoked their buy ratings on the stock and downgraded to neutral. Canaccord, already at neutral, cut its price target to $29. But if you really try to nail them down, Canaccord analysts admit they won't really get "interested" in the stock until it hits "$25."
And that was the good news
The bad news is that even $25 is a stretch. Why? Once again, all you need to do is examine the numbers.
Last month, I pointed out how on the surface, MAKO Surgical resembles past Fool recommendations Intuitive Surgical (Nasdaq: ISRG ) and Hansen Medical (Nasdaq: HNSN ) . Like those two worthies, it aims to improve outcomes and drive down surgical costs through the use of robotics. But when you really get down to the business of business -- earning a profit from what you sell -- MAKO looks a lot more like Hansen than it does like Intuitive.
MAKO's stock is plummeting, for one thing. But more importantly, it's plummeting for a reason. Losses are up, obviously, and the rate of sales growth decelerated sharply in Q1. Free cash flow is negative, and this cash-burn-rate is accelerating, with annual FCF about $3 million more negative than it was when we last looked at MAKO.
Yet despite all this, MAKO at $25 and change still looks overpriced. Valued on its revenues (since it has no profits to value it by), MAKO shares cost 12 times annual sales. That's roughly the same P/S investors pay to own a share of Intuitive -- but unlike MAKO, Intuitive is wildly profitable.
When you get right down to it, investors are paying an awful lot for the hope that one day, MAKO will grow up and turn into an enterprise, that's just as profitable as Intuitive Surgical. They may be right. It might. But even if MAKO turns successful one day, that's still no excuse for pricing the shares as if they've already achieved that success today.
The question's still up in the air. And until it's resolved, MAKO's share price needs to come down to earth.
So say I, and I've put my reputation on the line, predicting the stock's downfall. But if you want a second opinion, we just happen to have one available here for free. Read the Fool's pro-MAKO case in our new report, "Discover the Next Rule-Breaking Multibagger," and decide for yourself whom to believe.