While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of Trulia (NYSE:TRLA) slipped about 2% in pre-market trading after RBC Capital downgraded the real estate website operator from outperform to sector perform.
So what: Along with the downgrade, analyst Mark Mahaney planted a price target of $45 on the stock, almost exactly where it closed yesterday. So while momentum traders might be attracted to Trulia's sharp climb in recent weeks, Mahaney's call could reflect a sense on Wall Street that the company's valuation is becoming a bit stretched.
Now what: According to RBC, Trulia's risk/reward trade-off is pretty unappealing at this point. "YTD, TRLA shares have significantly outperformed the market, up 28%, vs. the S&P 500 which is up 6%, and the company has managed to fare well through the Internet Sector's turbulent past few months," said Mahaney. "TRLA's solid fundamentals have made this relative outperformance justified. However, with the stock now trading at 39X '15 EV/EBITDA and 6.8X '15 P/S, we don't see room for material upside." When you couple that lofty valuation with Trulia's still-questionable competitive moat, it's tough to disagree with RBC's cautious stance.
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.