Shares of British IT contractor Micro Focus International (NYSE:MFGP), which rallied last week after announcing a partnership with Amazon.com (NASDAQ:AMZN) continued to rise in Monday trading, eventually closing the day up 12.2%. This time around, it wasn't Amazon helping Micro Focus stock to fly, however.
It was Goldman Sachs.
Late Sunday, you see, Goldman Sachs came out with an upgrade on Micro Focus stock, rating the shares "buy" and nearly doubling its price target to 6.50 British pounds.
In its note, Goldman described Micro Focus as a value stock trading for less than 10 times projected 2022 free cash flow and predicted that if current trends of investors backing off of high-flying growth stocks continue, and there is a "rotation to value" (reports TheFly.com), Micro Focus shares could benefit from that.
And Goldman may be right. That being said, before following the analyst's advice, you should be aware of the risks.
Micro Focus is not your usual "value stock," after all. For one thing, it's got no earnings when calculated according to generally accepted accounting principles (GAAP). For another, it's carrying a lot of debt -- about $4.4 billion net of cash on hand.
Still, Goldman's right that there are attractions here. For example, despite the apparent unprofitability, Micro Focus generated $545 million in positive free cash flow over the past year. Even with all the debt, that results in a 10.3 current year free cash flow valuation on the stock, which means you might not have to wait for 2022 free cash flow to see the value in this one. Micro Focus shares actually look like a pretty good bargain already today.