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." Here, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

And speaking of the best ...
On a rose-colored day for the market Monday, shareholders of NVIDIA (Nasdaq: NVDA) watched their shares leap 5%. Thank the friendly analysts at JMP Securities -- and AT&T (NYSE: T).

According to JMP, AT&T's bid to acquire T-Mobile will have all sorts of unforeseen consequences for the telecom industry, including increased competition for customers between the new No. 2 player, Verizon (NYSE: VZ), and the incumbent No. 3, Sprint Nextel. As the only major telecom still iPhoneless, Sprint depends heavily on Android-run phone offerings to attract and retain customers. JMP argues that NVIDIA's "Tegra" smartphone chip "will continue to be in the lead reference designs for new Android operating systems." Hence, we can expect Sprint to move aggressively to promote phones containing NVIDIA's chip.

Furthermore, JMP points out that Tegra is integral to the Atrix phone that Motorola Mobility (NYSE: MMI) manufactures for AT&T. Tegra's also used in LG's Optimus 2x (offered by T-Mobile) and Verizon's Bionic phone. As a result, JMP believes that it probably doesn't matter who ultimately leads the pack in mobile-phone market share. All the major players will push Android products and thus boost NVIDIA's sales. But is JMP right?

Let's go to the tape
When an analyst makes a "heads I win, tails I win more" argument on a stock, I sense risk brewing. Such optimism about a stock often produces sky-high prices, because "can't miss" investment theses and "can't justify" valuations go hand in hand. (Netflix, Apple, we're looking in your direction.) And at 44 times earnings, NVIDIA does look a little pricey.

We must also consider JMP's reputation. NVIDIA's giving back some of its gains today, which makes me wonder whether investors who bought in a hurry yesterday are pausing today to double-check the record of the analyst who made the upgrade. In semiconductors, JMP's record has been anything but stellar over the past several years, including these major blunders:


JMP Rating

CAPS Rating
(out of 5)

JMP's Picks Lagging
S&P by

Intel (Nasdaq: INTC) Outperform **** (26 points)
Advanced Micro Devices (NYSE: AMD) Outperform ** (116 points)

That score for AMD represents the total of three picks, all wrong. And whatever you think about NVIDIA's chances in the smartphone arena, the company's history has been firmly rooted in PC chips. JMP's woeful record with key PC chipmakers AMD and Intel inspires no confidence in me.

That said, JMP has been working hard lately to improve its record in semiconductors -- and it does seem to be gaining traction. The majority of its active recommendations are now beating the market. Its recommendation of smartphone-leveraged semi-play Skyworks Solutions (Nasdaq: SWKS) has even beaten the market by more than than 122 percentage points.

Very interesting
I'd also point out that JMP's buy-thesis on NVIDIA does not hinge entirely on Tegra being irreplaceable. As reports, the key factors attracting JMP to NVIDIA include the "interesting valuation conditions emerging" at the stock. In that respect, I found two particularly intriguing factors worth considering.

First, at 44 times earnings, NVIDIA's P/E is more than triple AMD's, and more than four times Intel's valuation. It even costs more than Skyworks! Yet if you drill down to the company's cash flows, I think you'll be pleasantly surprised. NVIDIA actually generates more than twice as much free cash flow as its income statements suggest -- $578 million last year alone, a 41% increase from 2009. At a current market cap of just $11.3 billion, that works out to a price-to-free cash flow ratio of less than 20 on the stock.

Second, NVIDIA has a lot of cash on its balance sheet, which its 44 P/E does not reflect. Factor that hoard into the free cash flow equation, and the company's enterprise value-to-free cash flow ratio drops to just 14.

Foolish final thought
With most analysts expecting NVIDIA to grow profits at roughly 18% per year for the next five years, I agree with JMP that an EV/FCF ratio of 14 looks "interesting." I'd even say the stock looks downright attractive.

Intel is a Motley Fool Inside Value selection. NVIDIA, Apple, and Netflix are Motley Fool Stock Advisor picks. The Fool has written puts on Apple. Motley Fool Options has recommended a bull call spread position on Apple. The Fool owns shares of Apple. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended a diagonal call position on Intel.

Fool contributor Rich Smith does not own (nor is he short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 530 out of more than 170,000 members. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.