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.
Jefferies floods the tubes
As we all know by now, the Internet is "a series of tubes." And this morning, investment banker Jefferies flooded those tubes with a raft of new buy ratings for some of our favorite Internet companies. In rapid succession, the analyst announced its predictions for winners and losers in the e-commerce sphere. Want to know which ones are which? Well, let's run down the list.
Two winners in social media
Right off the bat, Jefferies argues that two of the biggest names in social networking -- Facebook
Past performance, however, is the wrong way to look at Facebook, according to Jefferies: "With a potent mix of unprecedented scale, high engagement, and social + behavioral targeting, we think Facebook is must-buy media for marketers as they follow users online." If true, this argues strongly in favor of renewed revenue growth at the company going forward. As for profit growth, well, Jefferies hopes that "expansion into other business areas" will happen eventually, and says, "at the current price investors effectively receive this optionality for free."
Meanwhile, LinkedIn offers the chance for an even quicker profit, as the company "is likely to continue to perform in the near term ... taking market share as it provides the most differentiated, effective products out there." But not without risk. According to StreetInsider.com, Jefferies is now forecasting a $0.20 per share loss at LinkedIn this year, followed by profits next year barely half of what it previously expected -- just $0.44. Yet, the analyst tells investors to go ahead and buy LinkedIn, anyway.
And two more in e-commerce
Those are some interesting numbers, given that the consensus on Wall Street is still forecasting a $0.63 per share profit for LinkedIn this year, followed by $1.31 in 2013. But, whoever's numbers are right, one thing is clear: Jefferies sees nothing wrong with paying a triple -- near quadruple -- P/E for LinkedIn, in hopes of cashing in later on. Clearly, Jefferies likes LinkedIn a lot ... and it's not the only stock for which price is no object to this analyst.
Shifting now to the e-commerce space, another stock that got the analyst's stamp of approval is Amazon.com
Why not? Logically, if and when Amazon reaches a point where it's built itself up big enough that it can slack off on capex, free cash flow (and GAAP profits) should surge, shrinking Amazon's P/E in a jiffy. Many analysts agree this is how things will play out, with earnings surging more than 33% per year on average over the next five years. Whether even that is fast enough to justify a triple-digit P/E, however, remains open to debate. (For the record: I vote "no.")
Fortunately, even if you don't like its Amazon idea, Jefferies has another e-commerce name for your consideration: eBay
Problem is, the converse is true: I'd argue that the Street is actually giving eBay too much credit for a supposed "turnaround" that, in all honesty, really isn't showing up in the numbers, yet. On its face, eBay looks overpriced at 17 times earnings, versus just 13% long-term growth estimates. In fact, though, the situation's worse than that. Over the past year, eBay's actually generated only about $1.9 billion in true free cash flow -- barely half of the $3.7 billion it claims to have "earned" under GAAP.
So, there you have it folks: Four hi-profile stocks that Jefferies likes a lot (and one more that it doesn't), their high share prices notwithstanding. Personally, I have to say that I'm leery of investing in any of them at today's valuations. I also have to say that when I check out Jefferies' track record on CAPS -- a record of just 46.5% accuracy on its picks -- that doesn't give me whole lot of confidence in the analyst's recommendations either.
Sure, overly optimistic stock prices don't faze this analyst. But, then again, it's not Jefferies' money at stake when you buy a stock on their say-so. My advice: Before taking their advice, get a second opinion. Read our premium stock reports on:
Fool contributor Rich Smith has no position, either short or long, in any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 255 out of more than 180,000 members. The Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.