At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best...
Two days in, the trading week's been a good one for Yahoo! (Nasdaq: YHOO) investors. On Monday, one of the hottest names in Internet stocks -- JMP Securities -- upgraded the stock to "outperform" on hopes that Yahoo!'s alliance with Microsoft (Nasdaq: MSFT) will prove even more fruitful than investors think.

At first glance, this doesn't quite explain the 2.8% jump in stock price Yahoo! enjoyed yesterday. We've known for months that Yahoo! would outsource its search business to Microsoft, and heard all about the yearly $500 million in operating income savings Yahoo! hopes to reap from the deal. By now, you'd think all of this was priced into the stock.

Think again
According to JMP, the $500 million that may already be priced into Yahoo!'s market cap is just the beginning. Despite all the publicity surrounding Yahoo! and Microsoft's deal, JMP still updated its previous estimates to add another $140 million to Yahoo!'s earnings before interest, taxes, depreciation, and amortization (EBITDA) this year, and a further $170 million in 2011. And that's just the start of the good news.

While JMP upgraded Yahoo! to "outperform," RBC Capital Markets had already rated Yahoo! an outperformer -- and they were busy upping their own estimates for the company's earnings. According to RBC, Yahoo!'s decision to permit bidding on keywords at sites it owns, separate from bidding at its partner sites, will shift revenue from the less profitable latter to the higher-margin former. As a result, 2011 EBITDA could get a further $200 million boost.

Let's go to the tape
I have to admit that all this analyst talk leaves me befuddled. The intricacies of who pays whom for what and how in Internet advertising have never been entirely clear to me. In case you're as lost as I am, let me break this down for you in a more understandable manner.

Before we go any further, let's confirm whether these analysts know their stuff. Both JMP and RBC seem to do a pretty good job picking winners in the Internet space. JMP's got a 52% record for accuracy over the long term, and its current picks are doing even better. Nearly 77% of JMP's active recommendations are currently thumping the market, including winners such as:

Companies

 

JMP Says:

CAPS says:

JMP's Picks Beating S&P By:

Google (Nasdaq: GOOG)

Outperform

***

32 points

Akamai (Nasdaq: AKAM)

Outperform

*****

32 points

eBay (Nasdaq: EBAY)

Outperform

***

4 points

RBC performs similarly, with 56% of current recommendations, and 57% overall, beating the S&P 500's performance:

Companies

 

RBC Says:

CAPS says:

RBC's Picks Beating S&P By:

Baidu (Nasdaq: BIDU)

Outperform

**

306 points (Two Picks)

IAC (Nasdaq: IACI)

Outperform

***

46 points

Google

Outperform

***

34 points

Judging from their records, these analysts have decent insight into the mysterious inner workings of the Internet ad market. Whatever helps Yahoo! generate more profit from its relationship with Microsoft, and however it charges customers for placing ads on its sites, chances look good that there's something there to back up the analysts' assertions.

But is that mysterious mojo enough to justify Yahoo!'s stock price? Last year, the Web giant generated a good $876 million in free cash flow from its business -- roughly 46% greater than reported earnings under GAAP. Divide that into the firm's $19.9 billion enterprise value, and you're looking at a business currently valued at about 22 times free cash flow.

To me, this price looks steep relative to consensus expectations for 17.5% long-term growth at Yahoo!. But JMP and RBC suggest that those expectations are wrong -- that they understate the boost in profits Yahoo! will enjoy from its new alliance with Microsoft. If the analysts are right -- and the record suggests they usually are -- Yahoo! will grow a whole lot faster than everybody else seems to think.

Foolish takeaway
If that's the case, Yahoo! may not be as overvalued as it looks. But I'm not a big fan of taking analyst recommendations on faith, especially when I don't fully understand the reasoning behind them.

The numbers JMP and RBC posit seem to suggest at best a slight undervaluation to Yahoo!'s stock. They're not saying that Yahoo! will beat Google, nor telling us that its shares are screamingly cheap. If I were you, I'd wait until Yahoo!'s price dips closer to rock bottom. We're not there yet.

Microsoft is a Motley Fool Inside Value pick, and Motley Fool Options has recommended a diagonal call position on it. eBay is a Motley Fool Stock Advisor selection and Motley Fool Options has recommended a bull call spread position on it. Akamai Technologies, Baidu, and Google are Motley Fool Rule Breakers recommendations.

Fool contributor Rich Smith has no position in any of the stocks named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 611 out of more than 150,000 members. The Motley Fool has a disclosure policy.