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Why iGATE Corporation Shares Could Plunge 10%

By Brian Pacampara – Jul 18, 2014 at 3:43AM

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Does this analyst make a good case? Or is it just more noise from Wall Street?

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.

Brian Pacampara has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.

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