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." 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.

Today we're going to take a look at three high-profile tech moves on Wall Street: a new buy rating for Exelixis (NAS: EXEL) , a downgrade for Travelzoo (NAS: TZOO) , and... the craziest increase in price target you ever heard of for SanDisk (NAS: SNDK) . More on that one in a moment, but first...

An Exel-ent stock idea?
Shares of cancer researcher Exelixis are soaring this morning, buoyed by news that investment banker Maxim Group just initiated coverage of the stock with a buy rating. So far, details on the new rating are scarce, and no one's quite sure what it is about Exelixis that Maxim likes. But we do know that the analyst likes it a lot. According to Maxim, this stock that cost just $4 and change yesterday could hit $9 within a year.

But should you listen to this advice? Yes, on the surface the stock looks attractive. After two straight quarters of positive profits, Exelixis costs a mere eight times earnings. But before you get too excited about the numbers, be aware that most analysts expect the company to drop right back down into the red and lose money both this year and next. Nor is it particularly encouraging to see that even with its positive GAAP profits, Exelixis has burned cash in each of the past four quarters and is currently free-cash-flow-negative to the tune of about $158 million annually. With $194 million in the bank (and $181 million in debt, resulting in net cash of just $13 million), continued cash-burn at present rates suggests a new round of share dilution may not be far off.

Maxim Group may be right. Exelixis may be the greatest biotech prospect around -- just take caution when investing in it. With great reward potential comes great risk.

Travelzoo: Who wants to clean out the cage?
A 6% decline in share price isn't what you'd ordinarily expect to see after a stock beats earnings, but that's the reward Travelzoo shareholders got treated to Thursday. Revenue growth of 6% and a penny more profit ($0.42) per share than expected weren't enough to save the stock from a steep decline yesterday -- and a pair of negative price target moves today.

Crunching the numbers, first Ascendiant Capital Markets and then The Benchmark Co. decided in quick succession to ratchet back expectations for the stock this morning. Ascendiant knocked 10% off its target price (now $31), while Benchmark rendered an even harsher verdict, butting its target 20% to $24 per share. But is that fair?

Actually, it may be not just fair, but rather generous. Sure, improved profits now have Travelzoo trading for just 19 times earnings, rather than the 125-times multiple still being shown on Yahoo! Finance. That doesn't look like too high a price for a company that most analysts believe can keep growing at nearly 20% per year for the next five years.

Two caveats are worth noting, however. First, Travelzoo's 6% revenue growth last quarter doesn't lend much confidence that this 20% estimate is really panning out. Second, Travelzoo's cash-flow statement shows us that even the profits the company is earning today aren't worth as much as they seem. After all, free cash flow for the past 12 months was a measly $12.4 million, or less than 60% of Travelzoo's claimed GAAP net income. Valued on these actual cash profits, therefore, the stock's still selling for more than 32 times free cash and is too expensive for its projected growth rate -- whether it ever achieves that growth or not.

Surprise! SanDisk!
It's getting really scary out there for tech investors. This morning, each of SanDisk, Riverbed (NAS: RVBD) , and Cypress Semiconductor (NYS: CY) found themselves downgraded on weak earnings news -- and for good reason. Riverbed, for example, earned less than half as much profit last quarter than it had a year ago, and it warned next quarter will fall short of Street projections as well. Meanwhile, Cypress looks like a victim of its own success. After reporting weak Q1 earnings, the company promised better days in the quarter to come and saw its stock leap as much as 22% yesterday. Now priced at 17 times earnings (a two-point premium to its industry), the stock was due for a pullback.

But the really interesting story here is SanDisk. After warning Wall Street that its sales and earnings were hurting earlier this month, the company made a rookie mistake: It didn't paint a dark enough picture. So when earnings did finally come out yesterday, the company managed to miss its own decreased guidance -- and got crushed.

Now here's where it gets interesting: Despite the bad news and the lousy PR management, ace investment banker Stifel Nicolaus took one look at SanDisk's news and upped its price target on the stock by 25% to $60!

Amazing. But is it true? Is SanDisk really worth 25% more than it was before the earnings miss? No one would like to believe it more than I (I own the stock), but I admit to serious doubts. No matter how low SanDisk's P/E looks today, I can't ignore the fact its free cash flow got flattened, and it now sells for a whopping 20 times FCF. That seems quite a lot for a company that has flubbed as badly as SanDisk just did. So while I own the stock myself and am glad to hear that someone out there in analyst-land still has faith in it, I don't.

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Whose advice should you take -- mine or that of "professional" analysts like Maxim, Benchmark, and Stifel Nicolaus?Check out my track record on Motley Fool CAPS, andcompare it to theirs. Decide for yourself whom to believe.

At the time thisarticle was published Fool contributorRich Smithregrets to inform that he still owns shares of SanDisk. He also has public recommendations available on more than 50 other companies. Check them out on Motley Fool CAPS, where he goes by the handle "TMFDitty" -- and is currently ranked No. 359 out of more than 180,000 CAPS members. The Motley Fool has adisclosure policy.The Motley Fool owns shares of Exelixis and Riverbed Technology.Motley Fool newsletter serviceshave recommended buying shares of Cypress Semiconductor, Travelzoo, Riverbed Technology, and Exelixis.Motley Fool newsletter serviceshave recommended writing covered calls on Riverbed Technology. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.

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