This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our top trio of newsmakers include a pair of now-downgraded techs, Netgear
Higher prices at Amazon
Amazon investors got a bit of a shock yesterday, when the company met expectations for revenues, beat on earnings, and was roundly criticized for it. Why? Mainly because "beating earnings" still involved a 96% drop in second-quarter profit. (Never underestimate the value of low expectations.) But also because costs appear to be rising quickly, while Amazon's guidance for the current quarter's revenues ($12.9 billion to $14.3 billion) seemed weak in light of Wall Street's expected $14.1 billion. Amazon might hit that target, but it might not.
Regardless, analysts at Oppenheimer took a leap of faith today, and disregarding the negative sentiment around Amazon, upped their price target on the stock to $260. Considering that the stock already costs more than 190 times earnings, this seems a tad optimistic. Oppy is telling us that Amazon's going to do really well in coming quarters (a promise Amazon itself hesitates to make). Well enough that, in due time, 190 times earnings is going to look pretty reasonable. Or as Prince once put it, it's time to party like it's 1999.
Investors, however, should try to remember how 1999 worked out for them.
Netgear can't connect
Switching gears now, we take our look at our first featured downgrade: home networking equipment maker Netgear, which "missed earnings" yesterday, and warned of weak sales in the third quarter as well. The shares fell 17% yesterday in response to the news, and a downgrade from Capstone Investments today (to "hold") isn't helping matters. But is the downgrade justified?
After all, Netgear did grow revenues 10% last quarter. It grew earnings, too, to $0.57 per share. As a result, the stock now sells for just 13.5 times earnings, which doesn't look at all unreasonable in light of consensus expectations for 15.5% long-term growth.
Sure, making money in the near-term may prove difficult, but the long-term value of this company is clear from the stock price, and yesterday's news did nothing to change that... except make the stock cheaper for new buyers.
Also taking a hit this week is Boston Scientific, which yesterday announced a pretty sizable loss for the second quarter -- $3.4 billion. Gulp.
Northland Securities is responding to the news with a downgrade to "market perform," and it's hard to argue with that decision. After all, at the 5% rate of profits growth Wall Street is expecting from it, Boston Scientific's 15.5 times earnings valuation looks pretty steep.
Boston Scientific also lowered sales guidance for the rest of this year. Granted, management says things will pick back up in 2013, but the company's even longer-term, five-year growth rate tells us that any pickup will be temporary at best. So basically, what we're looking at here is a slow-grower (so it's not a growth stock), that's not particularly cheap (scratch value stock, too) , and doesn't even pay a dividend (translation: no income). That's three strikes against Boston Sci. This one deserves to be called out of your portfolio.
Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services have recommended buying shares of NetGear and Amazon.com.