While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of Rocket Fuel Inc. (NASDAQ:FUEL) bounced back 5% this morning after BMO Capital upgraded the artificial-intelligence digital advertising company from "market perform" to "outperform."
So what: Despite the upgrade, analyst Daniel Salmon lowered his price target to $50 (from $65), representing about 32% worth of upside to yesterday's close. While momentum traders might be turned off by Friday's big drop -- fueled by a disappointing Q3 -- Salmon believes that the punishment was overdone, presenting patient investors with a tasty turnaround opportunity.
Now what: BMO sees Rocket Fuel's risk/reward trade-off as a rather attractive at this point. "Weak results and guidance from Tremor Video (TRMR, Not rated, down 49% on Friday) exacerbated a valuation reversal for the ad tech group that peaked around the Criteo (CRTO, Not Rated) IPO on Oct. 30," noted BMO. "FUEL's 3Q13 revenue of $62.5 mn (+132% yoy growth) beat our estimate of $59.5 mn and consensus of $59 mn. The revenue retention rate of 178% (i.e., current client budgets up 78%) held up well versus the seasonally stronger 2Q (180%). And social-mobile-video revenue tripled yoy to 26% of the total, helping power 40 bp of revenue ex media cost margin expansion." Of course, when you consider the long-term margin and competitive uncertainty still surrounding Rocket Fuel's business model, conservative Fools would probably do well to maintain their distance.
Fool contributor Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.