Friday's Top Upgrades (and Downgrades)

This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines feature new buy ratings from Barclays Capital for Zillow and Yelp -- but not for VistaPrint . Let's find out why not.

A buyer's market for Zillow?
Barclays began the day with a new "overweight" recommendation for Internet realty information site Zillow -- not that you would know it from the stock's subsequent 3% drop. According to Barclays, Zillow shares will be worth $115 apiece a year from now. But so far, investors seem to be taking Deutsche Bank's advice more to heart -- and according to StreetInsider.com, although "Zillow has done an excellent job building a real estate asset spanning listings, mortgages, and home improvement with the largest audience in the space," the stock's valuation of 21 times sales makes Zillow "the most expensive stock in our universe."

That's a backhanded compliment if ever I heard one. So... who's right? Barclays, or Deutsche?


Honestly, I have to side with the Germans this time. Priced at $95 and change today, Barclays is predicting a 20% profit for investors who buy Zillow today -- but I think the shares are already pretty pricey as-is. With $6 million in trailing free cash flow, more than $11 million in GAAP losses, and $152 million in annual sales, Zillow shares cost an astounding 555 times FCF, which almost looks cheap when set beside Zillow's P/E ratio of "infinity." Price-to-sales, which works out to either 21 times sales according to Deutsche, or 22.6 times sales according to Yahoo! Finance, looks similarly sky-high.

Long story short, there's really no good way to make a valuation-based argument in favor of buying Zillow today. Best I can tell, putting money in Zillow at these prices is sheer speculation -- and not "investing" at all.

They "Yelp" for help
Believe it or not, Barclays' other buy recommendation today looks even worse than Zillow. Priced just under $62 today, Barclays thinks Yelp shares will fetch $64 a year from now -- a potential profit of a whopping... 3.4%.

That hardly seems an adequate a return on your investment, though, given the risks inherent in this stock. Losing money like Zillow, selling for more than 20 times annual sales (again like Zillow), but unlike Zillow burning its cash (with negative free cash flow of $3.1 million), Yelp stock is so fantastically overvalued as to make Zillow investors look conservative.

Regardless, a double dose of Wall Street confidence, which sees both Barclays and Deutsche endorsing the online urban ratings guide as a buy candidate this morning, has Yelp investors howling at the moon today. Shares are up nearly 5% as of this writing -- but I think investors who follow Wall Street's advice on this one will rue the day.

VistaPrint prints money
Finally, we turn -- with some trepidation, I admit -- to the one Internet stock that even Barclays has some worries about. And we wonder... if even Zillow and Yelp aren't badly enough overvalued to frighten away the Brit banker, how bad must VistaPrint be to earn the stock an "underweight" rating from Barclays?

Bad enough, as it turns out -- but perhaps not as bad as you might think.

VistaPrint shares cost a bit over $54 today, which works out to 64 times earnings -- quite a pretty penny given that most Wall Street analysts seeing the company growing earnings "only" 22% per year over the next five years. But in stark contrast to the companies Barclays likes, VistaPrint is actually doing a better job of generating cash profits than it's allowed to report as accounting profits under GAAP.

Free cash flow at VistaPrint amounted to $61 million over the past year, or more than twice the company's reported $29.4 million in GAAP earnings. That's not quite enough to make the stock "cheap," but it's enough to pull VistaPrint's price-to-free cash flow ratio back down to about 29 -- which could be almost reasonable assuming 22% annualized growth.

When you get right down to it though, even if VistaPrint is the least absurdly overvalued of these Internet stocks, it's still not cheap enough to buy.

No Pitch

Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Vistaprint and Zillow. The Motley Fool owns shares of Zillow. 

The article Friday's Top Upgrades (and Downgrades) originally appeared on Fool.com.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Learn about investing from the comfort of your own home.

Portfolio Basics

Take the first steps to building your portfolio.

View Course »

Investment Strategies

Learn the strategies you need to build a winning portfolio

View Course »

Add a Comment

*0 / 3000 Character Maximum