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...
What do you do when a company you follow beats earnings -- not just once, but four quarters in a row -- yet investors sell off the stock by 19% in response to its latest earnings beat? Well, you buy that stock, of course. At least, that's what you do if you're investment banker Jefferies & Co.
This morning, Jefferies announced that it's switching coverage on Wi-Fi hotspot specialist Boingo Wireless (WIFI) to a new analyst and lowering its price target to $35, but doubling down on its buy rating regardless, as reported today by TheFly.com. With Boingo closing below $25 a share last night, this implies a better-than-40% potential profit for new buyers today.
Here's what you need to know.
Boingo Wireless' latest earnings
Let's start with Boingo's Q3 earnings report, which came out just a couple weeks ago. In it, Boingo was pleased to announce that, while it wasn't profitable exactly, it did at least lose less money in Q3 of this year than it lost in Q3 of last year -- and less money than Wall Street had expected it to lose, to boot.
Quarterly sales at Boingo grew 21.6% year over year in Q3, and the company reported a GAAP loss of $0.01 per diluted share on those sales, far better than $0.09-per-share loss it reported in Q3 2017.
Boingo also stated that it generated positive free cash flow of $8.5 million during the quarter. This is a debatable point, however. According to data from S&P Global Market Intelligence, Boingo was actually free-cash-flow negative during the quarter, burning through $13.6 million in cash as it spent heavily on both "property and equipment" and also "asset acquisitions" -- both of which S&P classifies as capital expenditures that are deducted from operating cash flow to arrive at free cash flow.
The long and the short of it is that, using S&P's standard definition of what constitutes capital spending, Boingo Wireless remains in cash-burn mode today, with $12.1 million in negative free cash flow over the last 12 months.
I admit: Personally, when I see Boingo offer up as fact such debatable data, that gets me to questioning the quality of this company's earnings overall. Still, I suspect that the investors who sold off Boingo Wireless stock on Nov. 2 had a different worry in mind: Guidance.
Towards the close of its earnings report, Boingo updated earnings guidance through the end of this year, noting that it now expects to record losses of between $0.12 and $0.24 per share on sales of between $243 million and $250 million.
So once again, this is a loss Boingo is projecting. But worse than the loss itself (to Wall Street's mind) may be the fact that the midpoint of Boingo's guidance shows the company probably missing analysts' latest loss estimate for the year ($0.13 per share) and their sales estimate ($249 million) as well. Seeing as investors are often forward-looking, this explains why they sold off Boingo Wireless stock earlier this month, despite its string of historical earnings beats.
Upgrading Boingo Wireless
But why, then, is Jefferies still insisting that Boingo is a buy?
For one thing, Jefferies isn't quite so quick to discount the earnings beat, and thinks Boingo's "solid" Q3 results are in fact a reason to be optimistic about the stock. Nor is the analyst disturbed by the company's somewhat less-than-hoped for guidance. In the long term, mobile data growth is driving demand for new wireless hotspots in "high-traffic buildings and venues," argues Jefferies in TheFly's write-up. And this demand for "wireless densification," says the analyst, is going to drive demand for Boingo Wireless' services and support sales growth going forward.
Valuing Boingo stock
Jefferies isn't alone in thinking this way. In fact, according to S&P Global data, most analysts who follow Boingo Wireless stock agree the company is likely to grow earnings at about 20% annually over the next five years.
The problem, though, is that it's not entirely clear what earnings these analysts are expecting Boingo to grow. It's certainly not GAAP earnings we're talking about, because Boingo hasn't reported a GAAP-profitable year in more than half a decade, is expected to lose more money this year as well, and most analysts are projecting GAAP losses for Boingo as far out as 2020. Boingo might grow free cash flow. Although currently free-cash-flow negative over the past 12 months, the company did generate more than $23 million in cash profits last year.
Still, if we take Boingo's $1 billion market capitalization and apply it to that 2017 FCF number, the result is that Boingo Wireless stock sells for roughly 45 times that year's free cash flow. This seems rather expensive to me, even if Boingo does succeed in returning to free-cash-flow positive status and growing those cash profits at 20% annually over time.
As a result, I can't say I'm particularly enthusiastic about Jefferies' decision to continue recommending Boingo Wireless today -- or particularly optimistic about its hoped-for 40% profit from buying the stock, either.