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...

LogMeIn (NASDAQ:LOGM) investors just can't catch a break. Three months ago, the company reported a modest earnings beat, but undermined investor confidence by giving weak guidance for the rest of the year. Yesterday, LogMeIn did it again -- beating earnings expectations but issuing downbeat guidance.

At last count, at least four Wall Street analysts had responded to the news by downgrading LogMeIn. Shares have fallen more than 20% in early Friday trading. Here's what you need to know.

Falling stock chart superimposed over digital map of the world

Image source: Getty Images.

Recapping the quarter

Last night, LogMeIn reported earning $1.32 per share in pro forma earnings -- $0.07 ahead of Wall Street estimates. (Revenue edged out expectations as well.) That sounds like good news, but when you examine the numbers according to generally accepted accounting principles (GAAP), the picture is less positive. GAAP profits for the fiscal second quarter were a mere $0.12 per share. Moreover, LogMeIn's latest guidance for full-year sales and earnings -- $5.17 to $5.26 in pro forma profits on sales of between $1.18 billion and $1.19 billion -- continues to fall short of estimates.

CEO Bill Wagner called the quarter "solid" and said while the company sees "isolated headwinds" ahead "in the second half of the year," he's still confident in "the trajectory of our long-term growth drivers."

Granted, the "headwinds" in question have been evident since the beginning of this year, as evidenced by LogMeIn's disappointing guidance last quarter. But judging from the massive sell-off we're seeing, it seems investors are taking the warnings more seriously this time around.

Wall Street reacts

As mentioned above, four separate analysts have responded to LogMeIn's report by downgrading the stock, according to reports from TheFly.com. Here's what they're saying:

  • W. Baird called Q2 results "solid," but noted "increasing weakness in [LogMeIn's GoTo] core collaboration segment." Baird is downgrading the stock to neutral and knocking its price target down by nearly a third -- to $100.
  • Citing "operational issues" that "have been brewing for several quarters," RBC Capital said it has less "confidence in LogMeIn's growth potential" than before it saw the new guidance. RBC cut its rating to sector perform and cut its price target even further -- to just $90 a share.
  • Though acknowledging that LogMeIn beat earnings, Piper Jaffray also adopted a neutral position on the stock, warning that it sees "a number of issues impacting renewal rates in [LogMeIn's] collaboration business" -- i.e., the GoTo business that enables users on one device to remotely access their data on another device far away. Piper's price target: $95.
  • And JPMorgan downgraded LogMeIn to neutral as well, with a $96 price target. JPMorgan notes that the collaboration business that everyone else has been knocking accounts for 57% of LogMeIn's revenue. The analyst sees LogMeIn's problems with GoTo explaining essentially the entire shortfall in guidance, and doesn't see these problems getting worked out for at least "a couple of quarters."

At this point, KeyBanc appears to be the most optimistic of the analysts following LogMeIn, and even it called the Q2 news "disappointing" and cut its price target on the stock by $15 to $120.

What to do now

So what should you do? Here's how I see things:

Sales at LogMeIn are slowing, but at $305.6 million, still grew a very healthy 19% in Q2, and are up 32% year to date. Profits, on the other hand, declined 57% for the quarter. But for the first half, LogMeIn is now profitable with per-share earnings of $0.68 -- after losing money in last year's first half.

Free cash flow was $96.8 million for the second quarter -- up 20% year over year. FCF for the first half was $243.6 million -- up 33%. Run-rate that out and, even with its GoTo problems not yet fixed, LogMeIn is looking at generating potentially $487 million in positive free cash flow this year.

Weighed against a company market cap of $4.2 billion, that works out to a forward price-to-free-cash-flow ratio of just 8.6. A more conservative estimate, valuing the stock on trailing free cash flow of $340 million, would put LogMeIn stock at a P/FCF ratio of 12.4.

Either way, though, I think these are fair valuations to pay for a stock that Wall Street still sees growing earnings at 15% annually over the next five years -- and that just finished reporting 19% sales growth despite admitted "headwinds" to its business.

Believe it or not, after the sell-off, it just might be time to buy LogMeIn.