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...
2018 hasn't been a great year for media monitor comScore (NASDAQOTH:SCOR). Unprofitable and with weak, single-digit sales growth, comScore stock has lost nearly half its value over the past 12 months. Despite this, today analysts at Needham & Co. announced their confidence in comScore as a cheap way to play the television shift to over-the-top (OTT) viewing -- and resumed coverage with a buy rating and a $20 price target. If they're right about that, shares of comScore (currently priced at just $16 and change) could soar as much as 25% in 12 months.
Here's what you need to know.
It's been a while since we last wrote about comScore here at The Motley Fool -- and the news back then wasn't so great -- so perhaps a brief reintroduction is in order. Broadly stated, comScore is an "information and analytics" company, focusing on "information about content and advertising consumption" via cinema, television, and digital devices such as smartphones, tablets and PCs -- and most importantly to Needham, via OTT devices like those manufactured by Roku, Apple, and Amazon.com. comScore collects data on content and advertising viewed through such media, crunches said data, and sells it to customers that need it, such as ad buyers.
This should be a profitable business -- asset-light and with a large customer base. comScore rival Nielsen (NYSE:NLSN) has made good money off of conducting similar activities for years, albeit its profitability has been declining steadily over the past three or four years, according to data from S&P Global Market Intelligence.
In the case of comScore, however, the situation's even worse: comScore hasn't booked a full-year profit since 2009!
Why Needham likes comScore
You'd think that might dissuade an analyst like Needham from endorsing comScore, but Needham remains optimistic. In today's buy rating (covered by StreetInsider.com), the analyst argues that comScore offers investors "a pure-play way to invest in the shift toward streaming and OTT viewing and monetization at a much lower valuation than other OTT alternatives such as Netflix, Roku and Trade Desk."
comScore's relation to ad-campaign marketer Trade Desk seems pretty clear. Why comScore should be considered as an alternative to Netflix and Roku may not be as immediately obvious, but Needham says that "US consumers are rapidly shifting their TV viewing toward a myriad of mobile screens and on-demand viewing through streaming and [OTT] options, as subscribers abandon the large linear TV bundle." Needham seems to think that comScore's ability to crunch data on OTT viewing habits makes it just as valid a play on the shift to OTT as the stocks of companies that stream OTT content or build the OTT devices.
Should you like comScore, too?
And I won't argue the point. comScore is a valid play on OTT. I just disagree that it's the best play -- for all their faults, Nielsen and Netflix are at least profitable today, while Roku is expected to turn profitable two years before comScore does. In fact, I'd argue comScore isn't really a very good idea at all.
Why not? Well, for one thing, there's the timeline. comScore's sales grew a bare 2.5% in its last reported quarter, and management is promising similarly "modest" growth in Q4, with no prospect of profits. According to analysts surveyed by S&P Global, comScore isn't expected to turn an actual GAAP profit until 2022 at the earliest.
Granted, this also means that analysts think comScore will turn a profit eventually. But after nearly a decade of failing to do so, I think comScore has been given long enough to prove itself already. I've little interest in betting that another three or four years will make a difference. If even a rival like Nielsen -- with 10 times comScore's market cap, 16 times its revenue stream, and the advantages of scale that come with such a large revenue stream -- is struggling right now, with profits declining year in and year out, then I don't see a lot of hope for comScore doing much better.
Long story short: Betting that this time will be different isn't often a winning strategy in investing. Needham is making a bad bet on comScore.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AMZN, AAPL, NFLX, and TTD. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool has a disclosure policy.