Rating Wall Street's Ratings
Apr 24th 2012 9:34PM
Updated Apr 24th 2012 9:36PM
Earnings season brings on a fury of upgrades and downgrades, and it can be an all-day affair just to get through them all. Let's look at four stocks on which analysts have weighed in, and I'll add my own opinions on the moves.
Netflix (NAS: NFLX)
Pacific Crest has upgraded Netflix to outperform, with a price target of $130.
Why? As anyone within a 10-mile radius of any financial news knows by now, Netflix shares are hurting. Even though the company surpassed analyst expectations, investors are running scared based on slower-than-expected growth prospects and the rising cost of content acquisitions.
Justified? Yes, although a price target of $130 is a little high given what we know about the future of the company. There needs to be some faith in management here. Reed Hastings and his team have built not just a business, but a new era of content management and delivery. Have there been hiccups? Yes. Will there be more? Yes. Wall Street overreacts when a high-growth company focuses on fundamental business development rather than analyst-friendly metrics. Hastings has a lot of work to do to tackle the rising costs of content acquisition, but based on his and the company's track record, I believe it can be done.
Rambus (NAS: RMBS)
JPMorgan raised Rambus to outperform, with a price target of $6.50.
Why? After worse-than-expected EPS results and downgrades, the company's stock took a big tumble Monday -- about 10%. JPMorgan clearly believes the company's strong balance sheet and long-term prospects outweigh the short-term results and negative market sentiment.
Justified? Yes. This company is particularly vulnerable to analyst opinions. Monday's downgrades sent the stock cascading down, only to make a nearly full recovery today after JPMorgan's upgrade. Rambus is trading near its 52-week low, but it still generates positive operating cash flow, with very manageable debt on the balance sheet.
Fortinet (NAS: FTNT)
Nomura raised Fortinet to buy, with a price target of $32.
Why? The cyber-security company focuses on unified threat management, or UTM, one of the fastest-growing areas in network security. Nomura likes the increased market share as Fortinet establishes itself as a segment leader.
Justified? No. While revenue and cash flow have grown steadily over the last few years, you are paying 70 times earnings for the company. For that price, I want to see something more disruptive. On the bright side, current assets cover total liabilities, which lets investors know the company isn't overspending on the technology. Fortinet looks like a solid company with a good hold of the UTM market, but there needs to be more here. The market agrees, as the stock traded down more than 2% today despite the upgrade.
Clearwire (NAS: CLWR)
Jeffries downgraded Clearwire to hold, with a $2 price target.
Why? Clearwire's spectrum, the valuable asset the company may sell, is suffering from Verizon and DISH Network's near-term bandwidth availability. What does all that jargon mean? The company may have a working-capital shortage.
Justified? Yes. This is a big deal for Clearwire. If it can't sell its spectrum, it's going to have a hard time funding the rest of the business. Even though Clearwire has an experienced management team, the company has had a rough ride as troubled technology and outside forces limit the performance potential. Clearwire closed the day down nearly 10%.
Keep an eye on this series to stay in the know, and save the rest of your day for coffee and Facebook.
At the time this article was published Fool contributor Michael Lewis owns no shares of the stocks mentioned above. Motley Fool newsletter services have recommended buying shares of Netflix. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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