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 iGATE (NASDAQ: IGTE) slipped more than 1% in premarket trading Friday after Nomura Securities downgraded the IT services specialist from Neutral to Reduce.
So what: Along with the downgrade, analyst Ashwin Mehta planted a price target of $35 on the stock, representing about 9% worth of downside to yesterday's close. So while momentum traders might be turned attracted to iGATE's price strength in recent weeks, Mehta's call could reflect a sense on Wall Street that the risks surrounding its growth trajectory are being largely overlooked.
Now what: According to Nomura, iGATE's risk/reward trade-off isn't too attractive at this point. "News flow at iGATE has been positive with: 1) successive large deal wins over the past five quarters; and 2) revenue CQGR improving to 2.4% over the past four quarters (vs. 1.4% over the prior four quarters) and likely sustenance of our forecast of nearly 3% CQGR in the medium term," said Mehta. "However, we are not too excited as: 1) our higher-than-consensus revenue expectations are largely unchanged; and 2) we believe its revenue growth is still likely to be below that for the industry." When you couple that downbeat view with iGATE's 30-plus P/E, it's tough to disagree with Nomura's bearishness.
