This Just In: More Upgrades and Downgrades
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." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.
So 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.
Today, we're going to take a look at three high-profile ratings moves on Wall Street: a new buy rating for Mitek Systems (NAS: MITK) , but a downgrade for Micron (NAS: MU) , and a big, big upgrade for Tesla Motors (NAS: TSLA) . Let's dive right in.
Mitek gets mightier
Not many people have heard of smartphone scanning software maker Mitek Systems, but those who have like the story a lot. A few weeks ago, we discussed JMP Securities' endorsement of the stock. This morning, Mitek gained another fan when analysts at Needham & Co. initiated coverage with a buy rating as well. As StreetInsider.com relates, Needham sees "banks accelerating the rollout of mobile banking services both as a customer acquisition and a retention strategy." It continues: "Through its proprietary and patented technology, Mitek has established first-mover advantage in the emerging mobile check deposit market."
Needham thinks Mitek could ultimately capture as much as $1 billion in annual revenues from this business -- quite a jump from the $12 million it booked last year. Be that as it may, the company's only barely profitable today and sells for valuations that make "sky-high" seem an understatement: 15 times book value, 23 times sales, 500 times earnings. With numbers like these, I wouldn't bet that Mitek will outperform the market from here on out. And in fact, I'm betting against it. On Motley Fool CAPS I have publicly declared Mitek a likely loser.
While Micron gets Minnie-er
Speaking of losers, NAND and DRAM specialist Micron Technology reported a $0.23-per-share loss for fiscal Q2 last week, which was 21% worse than it lost in Q1, and far worse than the $0.07-per-share profit earned in last year's Q2. Analyst Oppenheimer quickly downgraded the stock to "perform," citing limited "visibility" as to when Micron will start earning some profits for its shareholders again.
There is at least some good news here in that regard, however. In its post-earnings conference call, Micron's CFO told investors that Micron has a set profit margin "built into the [multi-year wafer supply] agreement" it's signed with Intel (NAS: INTC) . Micron didn't elaborate on exactly how much these wafers will cost Intel, or how profitable the contract will be for Micron -- but any profit at all would seem to be an improvement.
Meanwhile, Micron said it returned to cash profitability, at least, in Q2, generating positive free cash flow of $145 million. If we run-rate that number out through the next 12 months, it suggests that $580 million in positive annual FCF is a possibility, producing perhaps a 14 FCF valuation on the stock. At that level of profitability, Micron might eventually become worth buying. Then again, rival SanDisk (NAS: SNDK) is already churning out more free cash than this, and on lower revenues to boot. Given my druthers, I still think SanDisk is the better buy. (And yes, I've endorsed SanDisk on CAPS -- and I own the stock to boot.)
The day's most electric news, however, comes courtesy of electric-motorcar maker Tesla, which this morning scored a huge vote of confidence from the stock stars at Wunderlich. Citing ahead-of-schedule performance in bringing the Model S electric sedan to market, Wunderlich upped its price target on Tesla by more than 60%, to $49 a share, and urged investors to buy this stock before it races away.
Wunderlich avers that there's "no reason from a production standpoint" to doubt Tesla's ability to produce "5,000 cars per quarter." And while that's a bit short of the millions of cars GM and Ford crank out every quarter, it would still be a pretty rapid acceleration from the few thousand $100,000-Roadsters Tesla has built to date.
My only worry? Wunderlich argues that its $49 price target on the stock is easily justifiable if Tesla earns as little as $1 a share in 2014. If the idea of buying a stock with a 49 P/E sounds expensive to you, consider that Wunderlich is urging the purchase of a stock that won't even get down to that valuation for two more years. Pretty scary stuff.
While I'm not brave enough to say Elon Musk will defy the odds and make a go of this venture, for now, this is one stock I won't be buying a ticket to ride on any time soon. Instead, I'll probably pick up some more shares of another stock I already own -- the very one discussed in the new Fool report: "The Next Trillion-Dollar Revolution." Read it now, for free.
Whose advice should you take -- Rich's, or that of "professional" analysts like Needham, Oppenheimer, and Wunderlich? Check out my track record on Motley Fool CAPS, and compare it with theirs. Decide for yourself whom to believe.
At the time this article was published Fool contributorRich Smithowns no shares of, nor is he short, any company mentioned above. He does, however, have public recommendations available on more than 50 separate companies. Check them out on Motley Fool CAPS, where he goes by the handleTMFDitty -- and iscurrently ranked No. 385 out of more than 180,000 CAPS members.The Motley Fool owns shares of Ford and Intel.Motley Fool newsletter serviceshave recommended buying shares of General Motors, Intel, Ford, and Tesla Motors and creating a synthetic long position in Ford. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.