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.

Alice in LinkedIn-land
Oh, no. Now you've done it! On Monday, ace investment banker and LinkedIn (Nasdaq: LNKD) underwriter JPMorgan Chase did a little turnabout on the company. The analyst's downgrade sent the previously buy-rated stock plummeting 5% (and counting) -- and that's not even the strange part. The strange part is that JP only downgraded LinkedIn to "neutral."

So far, LinkedIn shares have run up 25% from JP's post-gag-order recommendation last month, and surged 29% past JP's own $85 price target. Yet, as reports, the worst JP's prepared to say about the stock today is that it's fairly priced. According to the analyst, LinkedIn's "risk/reward" is now "balanced" and has limited upside.

Curiouser and curiouser
Limited upside? On a stock that already costs 29% more than JP thought it might be worth one year from now? Yeah ... I suppose you could say the upside is limited, if by "limited" you mean "negative."

I mean, I get what JP's saying about LinkedIn "disrupting both the online and offline job recruitment markets." The company's viral marketing model is upending the staid world of recruitment-based staffing at Kelly Services (Nasdaq: KELYA) and Robert Half (NYSE: RHI). It's put even erstwhile "disruptors" like Monster Worldwide (NYSE: MWW) on the ropes. Last month, UBS went so far as to argue that LinkedIn would one day own one-third of the global recruitment market, and pull down $10 billion in annual revenues. But consider a couple of other points JP makes in its downgrade:

  • The analyst warns that LinkedIn will likely show a loss on second-quarter earnings when it reports next month.
  • Comparing the company to another "disruptor," Netflix (Nasdaq: NFLX), JP notes that despite carrying a market cap similar to Netflix, LinkedIn today sells for one-seventh Netflix's 2012 revenues, and one-seventh Netflix's 2012 EBITDA. (To heighten the contrast, Netflix is almost certain to report strong profits for the June-ended quarter.)

I'd add that LinkedIn currently sports a price-to-sales ratio 60% higher than fellow hot-IPO stock Yandex (Nasdaq: YNDX), and fully twice the P/S ratio of Pandora Media (NYSE: P) -- two other stocks I view as grossly overvalued. Despite this, JPMorgan says you should hold onto your LinkedIn shares. I think that's a mistake. But it won't be the first one JP's made.

"Speak English! I don't know the meaning of half those long words, and I don't believe you do either!"

Remember the mental (and arithmetical) gymnastics Wall Street had to go through to convince investors that LinkedIn was a "buy" last month? JP gave us the "disruptive" comment, urging investors to ignore the stock's obvious overvaluation because this time things were different. Bank of America won the convoluted-language prize, "explaining" its bullishness by pricing LinkedIn at "65x discounting 2014 EPS back w-years at 10%, a multiple equal to 1x 4-year profit growth."

Never mind that this formula made no sense. Focus on the fact that even with use of it, B of A was only able to get to a $92 valuation for LinkedIn shares. JP said $85 -- and the stock's selling for $105 today.

"I wonder if I've been changed in the night? Let me think. Was I the same when I got up this morning? I almost think I can remember feeling a little different."

Heedless of what it told us just three weeks ago, JPMorgan is now telling us that while the only thing that's changed about LinkedIn is the price ... this price is now suddenly justified. The company's valuation clearly required the banker to downgrade from "buy." Yet JP simply cannot bring itself to state the obvious: LinkedIn is so overvalued that it deserves to be sold.

Foolish takeaway
LinkedIn was crazy-overpriced in June. It's even crazier-overpriced at 666 times earnings today. JPMorgan can't say that about a stock whose IPO it underwrote. I just did.

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. 553 out of more than 170,000 members. The Motley Fool has a disclosure policy.

Motley Fool newsletter services have recommended buying shares of and puts on Netflix. Motley Fool newsletter services have recommended shorting Kelly Services. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.