This Just In: Upgrades and Downgrades

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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.

Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.

And they're off!
Pretty much everybody who's anybody on the Street (and a few more who aren't) initiated coverage of Groupon (NAS: GRPN) this morning. The post-initial public offering "quiet period" just expired, and the gags have come off the folks who underwrote the IPO. As early results rolled in, Barron's took a tally:

  • An underwhelming seven neutral votes from Deutsche Bank, Morgan Stanley, Citigroup, Credit Suisse, RBC Capital, JPMorgan, and Janney Capital.
  • Four more optimistic buy ratings from Goldman Sachs, Wells Fargo, Barclays Capital, and Bank of America's Merrill Lynch.
  • And a grand total of zero sells. Coming from the same people who brought Groupon to market, I have to say that I'm shocked (shocked!) at the absence of negativism here.

But moving on ... so far, Goldman's bulls are targeting a $29 price for Groupon shares, touting the company's potential to dominate a "massive local advertising market with which the Internet has long struggled." Goldman conservatively estimates this market at $100 billion or more per year in Groupon's core markets, before diving right off the deep end and positing a potential "$10 trillion" opportunity around the globe.

More hesitant Groupon backers are simultaneously more, and less, enthusiastic about the company's prospects. While not willing to go quite as far as Goldman, JPMorgan, for example, admits a potential global market size of $5.3 trillion. At the same time, JP thinks the U.S. market could be a whole lot bigger than even Goldman posits -- $1.4 trillion, in fact. Even so, JP suggests investors wait a while before diving in because at today's share price, there's "little room for error."

Um, how little is "little"?
Good question. Here's a better one: "Is there in fact any chance that investors in Groupon today will earn a profit?"

The answer, I fear, is no. Let's begin with the obvious: Groupon shares are frightfully expensive. The company's not profitable, which makes valuing it on P/E an exercise in futility. It's generating free cash flow (as I pointed out last month), but with the explosion in share count, Groupon's $143 million in trailing FCF values the company at more than 100 times FCF.

Now, is Groupon growing? Is it targeting a big market? Yes and yes. Problem is, that market isn't all Groupon's for the taking. Whether you guesstimate the U.S. opportunity at $100 billion or even $1.4 trillion, Groupon faces a host of competitors that are seeking their own slices of the pie. Google, Yahoo! (NAS: YHOO) , Amazon.com (NAS: AMZN) , and LivingSocial -- and those are just the "name brands" -- all will be giving Groupon and its shareholders a run for their money here at home.

Is the global market bigger? Whether you call it "$5.3 trillion" or "$10 trillion," of course it is. But again, it's not Groupon's by default. Over in China, arguably the biggest consumer market on the globe, I certainly expect Baidu (NAS: BIDU) to pose a formidable threat to Groupon. Tiny (Asian) tigerDangdang (NYS: DANG) as well. The curious alliance among Alibaba, eBay (NAS: EBAY) , and UPS (NYS: UPS) , which aims to connect millions of sellers with billions of buyers through UPS' extensive logistics system, will surely want to participate in this multitrillion-dollar bonanza as well.

Foolish takeaway
If Groupon were the only game in town, I suppose I could see how investors might be willing to pay 100 times free cash flow to participate in an opportunity this big. (I, personally, don't pay triple-digit multiples for anything.) Facts, however, are stubborn things. And the plain fact of the matter is that the market we're being told to invest in probably isn't as big as Groupon's IPO backers say it is. Nor will Groupon grow as fast as they say it will. Not if Groupon's rivals have anything to say about it, at least.

And they always do.

Fortunately, you don't have to pay 100 times free cash flow, or infinity times nonexistent earnings, to make a profit on the market. Click here, and we'll tell you about "The Only Stock You Need To Profit From the NEW Technology Revolution" in our new, and absolutely free report.

At the time this article was published Fool contributor Rich Smith owns shares of Google. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 332 out of more than 180,000 members. The Motley Fool has a disclosure policy.The Motley Fool owns shares of UPS, Amazon.com, Google, Wells Fargo, JPMorgan Chase, Bank of America, Citigroup, and Yahoo, as well as having created a covered strange position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of eBay, Google, Baidu, Amazon.com, Goldman Sachs, and Yahoo, along with writing puts in eBay.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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