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." Today, 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.
LinkedIn to looniness
It's been 40 days since the LinkedIn
Bank of America
(NYSE: BAC)-- Buy.
(NYSE: JPM)-- Buy, buy.
(NYSE: MS)-- Buy, buy, buy!
(NYSE: UBS)-- Buy till it hurts!
So far, The Wall Street Journal has already run two articles mocking the market-makers for their frenzied (feigned?) enthusiasm for LinkedIn. The company has a neat idea for a business, but at 518 times earnings, it's a bit pricey for a stock.
Nevertheless, the analysts do their darnedest to justify the valuation. In multiple "research" notes, the analysts repeatedly refer to LinkedIn "disrupting" the status quo employment market (JPMorgan), and predict "better-than-expected growth in the user base [and] revenue outperformance" (UBS). How does an analyst go about "expecting" the "better-than-expected," anyhow?
Just check out the mental and mathematical gymnastics in this gem from B of A: According to the banker, LinkedIn is worth $92 a share based on "65x discounting 2014 EPS back w-years at 10%, a multiple equal to 1x 4-year profit growth."
A couple of caveats
Two things about that comment. First, it's a grammatical mess, seemingly designed to confuse the reader. In essence, B of A seems to be predicting 65% annual profit growth from today's levels. (Again, on a triple digit P/E stock.)
Second, it's just astounding that after going to all this effort to invent a justification for the stock price, all B of A can come up with is a target price $3 higher than what LinkedIn costs today. And that justifies a buy rating?
Apparently, yes -- at least if you happen to be one of four bankers who've just collectively underwritten upwards of 8 million shares of LinkedIn, and are looking to unload them on the public. Those 8 million shares at $92 apiece create 736 million good reasons to be bullish about LinkedIn, at least in public.
But in private?
I have my doubts that Bank of America and its peers are really so optimistic about LinkedIn's chances -- and I'm downright certain you shouldn't follow their advice. Consider the record of UBS (the only one of these four bankers to still report its ratings publicly) on "professional services" stocks like LinkedIn.
Over the five years we've tracked it, UBS has racked up a record of truly shocking underperformance in this industry. To date, only about 32% of UBS's recommendations here have outperformed the market. It's underperformed the market by a good 22 percentage points on its three recommendations of Monster Worldwide
UBS's Picks Losing to S&P by
|Monster Worldwide||Outperform||**||22 points (picked thrice)|
|Robert Half||Outperform||***||52 points (picked twice)|
And yes, UBS is wrong about LinkedIn, too.
The high P/E ratio may be the clearest sign that LinkedIn is overvalued, but it's almost too easy a target. Instead, let's look at something more substantive. Like UBS, Bank of America is recommending LinkedIn, and since the two bankers shared in the underwriting, presumably they share the same way of thinking. According to B of A, LinkedIn recorded $243 million in revenue last year, but will eventually grow into a "$10 billion long-term revenue opportunity." JP Morgan, however, notes that the entire global staffing market currently sports revenue of just $27 billion.
In other words, LinkedIn is a buy if you assume:
- That it will grow its revenues more than 40-fold ... eventually.
- That this single firm will ultimately capture more than one-third of the global market for hiring
- And that to own a piece of this action, you should be willing to pay 0.8 times those far-off revenues today, when real businesses like Korn/Ferry, Robert Half, and Monster cost only 1-2 times today's revenues.
Sounds reasonable to you? It doesn't to me -- but then, I didn't underwrite the IPO.
Fool contributor Rich Smith does not own shares of (or short) any company named above, but The Motley Fool owns shares of JPMorgan Chase and owns shares of and has opened a short position on Bank of America. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 511 out of more than 170,000 members. 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.