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." 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.

Foolish takeaway
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.

Motley Fool newsletter services have recommended buying shares of Intuitive Surgical and MAKO Surgical, but Fool contributor Rich Smith does not own shares of (nor is he short) any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 335 out of more than 180,000 members. The Motley Fool has a disclosure policy.

We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


Read/Post Comments (10) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 10, 2012, at 5:21 AM, sigvald1 wrote:

    The caps rating was 4 out og 5 stars now it is 5 out og 5 and this seems to be Mr. Gardners best bet for a multibager stock

    You can trash Mako all you want but I totally believe it will become a monster, it sucks we all lost money this quarter, tons, but now is a great time to grab more shares

    This is a game changer

  • Report this Comment On May 10, 2012, at 7:06 AM, GCF007 wrote:

    I bought based on the Motley Fool's recommendation that it was the one stock to own for the next decade with disruptive technology.

    Does Motley Fool still stand behind this special report or NOT?

  • Report this Comment On May 10, 2012, at 10:40 AM, NovaJim wrote:

    Motley Fool's "Rule Breakers" subscription service had MAKO as a "best buy" in March this year - just two months ago - when its price was $43.75. Makes you wonder about the reliability of the information coming from MF.

  • Report this Comment On May 10, 2012, at 10:52 AM, TMFDitty wrote:

    Opinions differ within the Fool, folks. I've never been really impressed with MAKO, but the RB team doesn't necessarily agree with me. (In fact, I'd go so far as to say we rarely agree.)

    This time, I got one right, but over the long haul, I'd say the RB team's picks have worked out pretty well.

    As for what they think about MAKO now, post-earnings ... keep an eye on your inboxes. I imagine an update will be coming soon.

    TMFDitty

  • Report this Comment On May 10, 2012, at 10:54 AM, TMFDitty wrote:

    Also, RB subscribers can get a quick read on how the team views the news here:

    http://boards.fool.com/1069/mako-q1-30025490.aspx

    TMFDitty

  • Report this Comment On May 10, 2012, at 11:19 AM, FRINEDOFFOXY wrote:

    Analysts who predict doom for MAKO are wrong. Two reasons: Their miss on revenues was not all that bad and they have the best product on the market -- yes even better than ISURG. Secondly much of this price hammer has been driven by short sellers. Buy MAKO now.

    Paul

  • Report this Comment On May 10, 2012, at 3:08 PM, obga18 wrote:

    be greedy when others are fearful, thanks for the opp to by more shares at a fraction of the cost scardey cats

  • Report this Comment On May 10, 2012, at 4:59 PM, kydderr wrote:

    I will sell you mine at $29! what does the guy say above? $25 is high and yet the Fool recommended to us at $40.! Where'd all that research fall to when one and all started thinking this was a "great stock"? That information hasn't changed in three days. How long to recover a stock that was bought at $40.+ when it is now -$25!!!!!!!!!!!!!!!!!!!!!!!!!

  • Report this Comment On May 11, 2012, at 11:49 AM, alon2k5 wrote:

    I love to read the bear case, Rich.

    thanks

  • Report this Comment On May 19, 2012, at 9:07 AM, softwareinvent wrote:

    Pointing to the slowing sales growth rate is somewhat misleading. Their YoY Q1 revenue growth was 45%. Hardly a worrying number.

    And your comparison to Hansen is a stretch. Hansen has never had a 3 year revenue growth run like MAKO has already logged. In 2008, analysts were wondering when Hansen was going to finally break out (like they are still wondering today). With MAKO the only idea for bears to work from is the thinking that this growth rate surely can't continue. Two totally different stories.

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