Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Move over IPG Photonics (NASDAQ:IPGP). There's a new laser maker in town -- and Wall Street loves it.

It's been nearly a month now since tiny laser maker nLIGHT (NASDAQ:LASR) debuted on the Nasdaq. Up till now, the bankers who underwrote the IPO had been stuck in a "quiet period" in which they were unable to comment on the company's prospects. Now, that quiet period has ended -- and you can hardly shut them up about it.

No fewer than six separate bankers, including all five of those that underwrote the IPO, announced new ratings for nLIGHT this morning, according to data from StreetInsider.com (subscription required) and TheFly.com. What's more, all six rate the stock buy.

Green and red lasers

Red light? Green light? What does the future hold for stock in laser maker nLight? Image source: Getty Images.

Meet the bankers

Needham & Co calls nLIGHT "a small-cap version of a young IPG Photonics." Like fiber laser maker IPG, nLIGHT "is highly vertically integrated," says Needham. And while much smaller than IPG (nLIGHT has a market capitalization of $1 billion, while IPG Photonics comes in at $13 billion), Needham believes "it can make up for [what it lacks in scale with] differentiated technology that will enable it to generate 25% growth over the next several years, with steadily improving profitability."

DA Davidson likewise believes nLIGHT is an "emerging player" and likely "to grow at [a] double-digit annual pace for several years." Davidson argues that both customers and investors are looking for an alternative to IPG to reduce dependence on just one company's laser products. In the near term, Davidson is projecting 26% sales growth  and 50% earnings growth for nLIGHT next year.

Stifel agrees the company will show "above average" growth and argues nLIGHT stock deserves a debt-adjusted valuation of about four times annual sales (not trailing sales, mind you -- but the sales it's expected to make in fiscal 2020).

Canaccord Genuity focuses on nLIGHT's "technological differentiation and significant margin leverage potential through vertical integration" as reasons to own the stock. 

Raymond James (which helped the underwrite the IPO) and Northcoast Research (which didn't) also agree the stock is a buy. Target prices range from $34 a share (Needham) to $40 a share (Davidson and Stifel).

nLIGHT's potential profit

If these analysts are right, nLIGHT stock that costs about $30 today could gain as much as 33% over the next 12 months, giving the stock a market cap of about $1.3 billion. That's pretty incredible, given that less than a month ago, in the days leading up to its IPO, nLIGHT's backers were only hoping to sell the stock for between $13 and $15 a share, resulting in a market capitalization of no more than $510 million.

By IPO eve, though, that valuation had risen to $16 a share ($543 million market cap). And by the time the IPO actually happened, on April 26, the stock was off to the races, soaring nearly 70% from its $16 offering price to close nearly at $27 a share.

Such a quick run-up naturally raises the question of whether nLIGHT's potential is already priced in. Clearly, the company's backers don't think so. Are they right?

Valuing nLIGHT stock

That's actually very hard to say -- for now. You see, although nLIGHT has been in business since 2000 and is an established company with nearly $140 million in annual sales, it currently has no free cash flow to value it on -- and barely any profits. Trailing-12-month net income at the company is a mere $1.8 million, according to data from S&P Global Market Intelligence, or about $0.05 per share. Thus, valued on those earnings, nLIGHT stock sells for about 600 times earnings today.

Analysts expect nLIGHT's earnings to increase rapidly from here, however, with consensus projections calling for profits of $0.38 per share this year, growing 68% to $0.64 in 2019, and then another 53% in 2020, to $0.98 per share. (Free cash flow is also expected to turn positive in 2019.) If nLIGHT can maintain this pace, well, $0.64 in 2019 earnings divided into $30 a share would work out to a P/E of just under 47, and that would seem a fair price to pay for a company growing at 53% to 68% annually.

Still, nLIGHT is expected to report its first earnings as a public company just two days from now, after close of trading on Wednesday, May 23. With earnings so close at hand, my advice to investors considering the stock would be to hold off on buying right now, and see what management has to say about nLIGHT's performance and prospects later this week. There'll be plenty of time to buy then if the news is good enough.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends IPG Photonics. The Motley Fool has a disclosure policy.