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.
Who's hot, who's not -- in tech stocks
Wall Street treated investors to one big upgrade and one big downgrade in tech this morning, along with a more general "pick and shovel" play likely to outperform the market no matter who comes out on top among the big brand names. Let's take them in order.
First up, Goldman Sachs just got back from China with some important news for Apple (NASDAQ:AAPL) investors. As detailed in a report laid out by StreetInsider.com, Goldman is upping its rating on Apple contract manufacturer Hon Hai Precision, saying Hon Hai is "well positioned to profit from the second stage of smartphone and tablet growth," and will probably grow its business 7% this year -- largely because of Apple.
Rival Foxconn, on the other hand, is likely to lose Apple business as the company begins ordering lower-end, plastic-cased iPhones for the developing world market. (Foxconn has little competitive advantage in plastic casings).
This, according to Goldman, is going to hurt earnings at the Chinese contractor. The real headline here, however, is what Goldman sees happening for Apple, based on what it's found out about Hon Hai and Foxconn. Namely, based on the trends in orders and shipments it's reviewed, Goldman believes Apple will sell 175 million iPhones in 2013, and 251 million in 2014.
This works out to sales grow rates of 28% this year, and an even more astounding 43% for next year. iPad sales, meanwhile, will grow 45% and 26% in the two years. Even with some slight decline in average sales prices (plastic iPhones costing less than metal-cased phones, and iPad Minis costing less full-size iPads), this still seems to work out to earnings growth far above the 19% number that Wall Street as a whole is expecting Apple to produce over the next five years.
What's it mean to you? At a share price less than 10 times projected earnings today, Apple's a bargain if it achieves only the 19% earnings growth that Wall Street expects. If it does as well as Goldman thinks it will, the stock's even cheaper than it looks.
Now for the bad news. At the same time as Goldman is upping its faith in Apple, across the street at J.P. Morgan Chase, the analysts are cutting their projections for Amazon.com (NASDAQ:AMZN).
According to J.P., Amazon's stock has been able to maintain momentum based on its maintaining a "stable gross profit growth [rate] of 40% in 2012." Problem is, J.P. foresees a "material deceleration in gross profit growth to 31% in 2013." Combined with slower unit sales in its core e-commerce business, this suggests that the consensus growth estimates on Wall Street -- 40% annually for Amazon over the next five years -- may be overshooting the mark.
J.P. Morgan is downgrading the shares to "neutral" in response to its findings, but investors today might want to go a step further, get ahead of the game, and sell right now.
Why? Well, not to belabor the obvious, but currently, Amazon's not earning a profit. Its trailing-12-month earnings are actually negative. Forward earnings look better, but are still only good enough to give the stock a 75 forward P/E ratio. That's pricey even for 40% growth. If Amazon can only muster up earnings growth of 31% -- nearly a quarter less than investors are counting on -- then look out below.
With little more than slowing growth, a hyperinflated market cap, and anemic free cash flow (less than $400 million on a $122 billion market cap) to recommend it, I wouldn't touch Amazon.com shares with the proverbial 10-foot pole. (Which incidentally, you can buy on Amazon.com for $29.17, with free shipping on Amazon Prime).
Buy the tiebreaker?
So there you have it, folks. One tech stock to buy, and one to sell. But before closing out today's column, I want to mention one final tech rating -- this time a recommendation of SanDisk (NASDAQ:SNDK), coming out of Macquarie.
Macquarie initiated coverage of solid-state drive memory maker SanDisk today with an outperform rating and a $65 price target. Even though I own the stock, at first glance, I admit I was inclined to dismiss this recommendation out of hand, based on SanDisk's anemic trailing free cash flow number -- just $42 million, or barely 10% of the more than $417 million in GAAP "earnings" SanDisk reported last year. Fact is, though... Macquarie might be onto something here.
Free cash flow, which fell off a cliff in H1 of last year, has come back with a vengeance in H2, with SanDisk first moderating cash-burn in Q3, then gushing cash in Q4, as free cash flow topped $210 million. If the company can keep up that Q4 performance in 2013, it will generate more than $800 million in real cash profit, sport a 16 times price-to-free-cash-flow ratio, and become a clear buy based on its projected 24% long-term growth rate.
That is, however, a big "if." Building a buy thesis on one quarter's performance, no matter how strong, seems to me a risky proposition. One thing I can say for certain: I, for one, will not be buying any more SanDisk shares before seeing next month's Q1 numbers. While I'd love to trust that Macquarie's right, and that SanDisk's Q4 performance will turn into a year-long trend, the prudent course is to verify that this is more than just a single quarter's anomaly.
Fool contributor Rich Smith owns shares of Apple and SanDisk. The Motley Fool recommends Amazon.com, Apple, and Goldman Sachs. The Motley Fool owns shares of Amazon.com and Apple. Try any of our Foolish newsletter services free for 30 days. We 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.