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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.
Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.
And speaking of the best ...
Once upon a time, Sanford Bernstein was one of the best Internet stock analysts out there. Over the course of three years' work, from 2007 to 2009, Bernstein successively led investors to invest in companies like eBay (Nasdaq: EBAY), Google (Nasdaq: GOOG), and Baidu.com (Nasdaq: BIDU), racking up big wins on each (especially on Baidu, up more than three times in value since Bernstein picked it. Then ... somehow ... it forgot about the Internet.
Don't ask me why. Don't ask me how. Just give Bernstein a round of applause and a warm welcome back, because on Friday, this ace Internet stock picker reinitiated coverage of the industry -- and pointed out its two likeliest winners.
Booyahs from Bernstein
According to Bernstein, Amazon.com (Nasdaq: AMZN) and Google are the two biggest winners from the "transformation of retail, media, and payments" on the Internet. While the analyst also took a close look at alternative possibilities -- eBay, Yahoo! (Nasdaq: YHOO), and Netflix (Nasdaq: NFLX) -- Bernstein found significant flaws in each of these firms.
The rest...
For example, eBay is no longer the growth leader in trade on the Internet (and hasn't been for years). Going forward, its growth rate is likely to lag that of e-commerce in general (and Amazon in particular.) Yahoo!, while likely to get bought out soon, has already enjoyed a share price boost that bakes in a buyout premium. And while Netflix may not be as bad a business as it's been made out to be, the company has saturated its addressable U.S. market and now must seek growth in foreign locales -- Latin America, which lacks the infrastructure to support e-commerce, and Europe, where Netflix must battle entrenched homegrown rivals, according to Sanford Bernstein.
...and the "best"
In contrast, Amazon and Google possess the biggest "sustainable competitive advantages and strong growth potential" in the industry. Amazon's on the other side of the e-commerce trend from eBay, growing faster than the industry as a whole. The ecosystem of free shipping, free book lending, cheap Kindles, and cloud computing that it's building today looks positively Steve Jobs-ian in its ability to fence customers in -- and competition out.
Similarly, investors are underestimating the strength of Google's keyword search business, which Bernstein believes will grow faster, and keep growing longer, than most people realize. Bernstein sees the company earning more than $30 per share this year and more than $41 in 2012 -- and thinks Google's worth $743 a share.
Let's go to the tape
Is Bernstein right about all this? I wish I could give you an unqualified "yes," but in fact, I'm not convinced. I mean, at 20 times earnings and 21 times free cash, Google isn't the most obvious choice for a deep value investment. More importantly, I believe Google rose to greatness through its focus on doing one thing (search) and doing that better than anyone else. Google today, I worry, has its fingers in too many pots -- mobile phones, television, and ... windmills?! Meanwhile, I believe, its dominance in search is getting slowly but surely eroded by more innovative, artificially intelligent search products such as Apple's Siri and IBM's (NYSE: IBM) Watson supercomputer.
And as for Amazon, I simply cannot abide the price tag. Whatever you think about the Big A's growth rate, its Kindle, or the walled garden it's building around its business, the stock's too pricey for me to pay the cost of admission. I mean, seriously, folks -- 66 times free cash flow? 114 times earnings? Seems a bit steep to me.
Foolish final thought
Once upon a time, Bernstein was a great Internet analyst. After a two-month absence from the field, though, its two reinaugural recommendations leave me unimpressed and unconvinced that Bernstein will be great again. Fact is, of the five stocks discussed in the analyst's 109-page report last week, the one I actually like best... is one of the three that Bernstein left unrecommended.
Read why I think Netflix is actually the best of the five in this column right here.
And just in case you're in the mood for a second opinion, you're in luck. The Fool's just published a report on one company leading an entirely new revolution in e-commerce -- one that could be even bigger than Netflix. Find out all about it in our new -- and free! -- video report: Your credit card may soon be worthless. Here's why...
