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.
Everybody loves Yandex
"From Russia With Love," you say? How about "To Russia With Love"? If Wall Street was located in Hollywood, that's the movie they'd be making this week, as everybody and his Uncle Ned rushes forth to slap "buy" ratings on Russia's hottest Internet star: Yandex (Nasdaq: YNDX ) .
Yesterday, the gags came off Yandex's quintet of IPO underwriters, and the firms came out in defense of their superstar. Running down the list, Pacific Crest called the company an "outperformer" and predicted that the stock will hit $45 within a year. Piper Jaffray seconded the emotion, albeit with a less aggressive $40 target price. Morgan Stanley agreed, and Deutsche Bank made it darn near unanimous, singing the praises of Yandex's "est. 65% share" of the Russian Internet search market and predicting that "new revenue models" and "optimization … represent L-T drivers of revenue and profit growth."
A voice cries in the wilderness
Out of all this me-too-ing, one voice alone sounded a worrisome note: Goldman Sachs, which, despite helping to bring Yandex public a month ago, now warns that the shares are looking a little overheated. As StreetInsider.com reports, Goldman agrees with its cohorts about the great growth prospects in Russia. Problem is, even if Yandex succeeds in tagging along on Russia's "35% CAGR" story, the stock's 2012 P/E ratio of 39.5 prices all that growth in already.
Not only is this multiple a number many times bigger than the valuations at broadband and mobile Internet providers such as Mobile TeleSystems (NYSE: MBT ) and VimpelCom (NYSE: VIP ) -- both of which sell in the single digits for forward P/E -- but also, as Goldman points out, 39.5 is a richer forward-growth multiple than you'll find even in China, where Sohu.com (Nasdaq: SOHU ) can be bought for less than 14 times forward earnings, NetEase.com costs less than 13 times forward earnings, and even great-granddaddy Baidu (Nasdaq: BIDU ) is selling for a forward multiple of just more than 36. And in case you haven't heard, in terms of potential Internet users, China has a population roughly 10 times as large as Russia's.
As Goldman points out, this makes little sense. After all, even with its famed one-child restriction weighing on growth, China is still seeing net population growth over time. Russia, in contrast, has been stuck in population-contraction mode for years. Valuing Yandex at a higher multiple to forward growth, therefore, seems illogical. When you consider, furthermore, that Yandex's reported earnings over the past 12 months overstates the amount of actual free cash flow the business generates, the disconnect looks all the more severe.
Foolish takeaway
It's not every day you see an analyst come out and diss an IPO that it helped create. Indeed, despite numbers that seem to argue strongly in favor of selling Yandex, even Goldman can barely bring itself to call the stock a "hold." Still, when you consider that, as underwriter to the Yandex IPO, Goldman was responsible for distributing in excess of 10 million Yandex shares -- which are valued at around $350 million today -- even this cautious note speaks volumes.
Granted, the other bankers remain bullish on Yandex. But on the other hand, consider the source: If Yandex stock slips, it would cause losses for their clients -- and potentially damage their reputations.
Unless you have a similar stake riding on Yandex's success, I'd suggest you focus on Goldman's concerns -- ignore the snorts of approval from Morgan Stanley, Deutsche, and the other conflicted bulls.
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