Three technology stocks saw particularly large gains due to bullish calls on Tuesday, but were these good calls? A good call is determined by an analyst’s ability to prove his point with channel checks and/or other unknown fundamental research. Therefore, we shall see if the call was worthy of the movement.
Higher Margins, Revenue, and Profits…. But What About Debt?
The semiconductor company Freescale Semiconductor Ltd (NYSE:FSL) saw the biggest one-day, post-upgrade jump on Tuesday with gains of 10%. The gains came after Piper upgraded the stock from “Neutral” to “Overweight” and raised the price target from $15 to $18.
According to Piper, the company has made major efforts to restructure its business, including its near $6.5 billion in debt. Piper believes that a lower interest rate could yield a higher EPS, which has not been figured into expectations. Moreover, Piper sees higher sales of its networking chips, which are also high-margin products.
Clearly, Piper expects strong bottom-line performance, but the firm has also boosted its revenue and gross margin expectations. Thus, it should come as no surprise that the stock was flying higher on Tuesday. Overall, this is a company with a lot of positive momentum; almost doubling since Gregg Lowe was named the CEO on June 12.
While I do agree with the catalysts noted by Piper, I simply cannot disregard the company’s debt-to-assets ratio of more than 200%! To me, this is a highly vulnerable company, one that is yet to show margin growth. Therefore, I can’t say that I agree with the bullish call.
Are We Seeing a Boost in Momentum?
Facebook Inc (NASDAQ:FB) has very quietly posted a near 9% gain over the last month, including a 2.5% gain on Tuesday. These gains come as Deutsche Bank reiterates its “Buy” rating and boosts its price target a couple bucks to $37.
More importantly than the call itself was the channel checks that Deutsche notes. The firm sees growing ad momentum, slightly more upbeat than in Q1. Furthermore, Deutsche estimates that less than 2% of all Facebook Inc (NASDAQ:FB) mobile impressions account for 30% of its mobile revenue, which leaves a lot of room to run higher.
Personally, I agree with Deutsche Bank and believe that their notes are very important. After producing top-line growth of just 37.8% during its last quarter, many have feared that growth is decelerating. But if the company is really seeing increased momentum, then this upcoming quarter could shift sentiment. Moreover, the upside in terms of revenue per impression helps to validate the company’s valuation, showing the level of growth potential that exists. Hence, I am buying this call!
Is Upside Priced Into This Stock?
Yahoo! Inc. (NASDAQ:YHOO) continued its exceptional post-Marissa Mayer rally as the stock gained more than 3.5% on Tuesday. The stock was being driven by a bullish note and a $30 price target from Goldman Sachs.
Goldman insists that pricing pressure is not hurting Yahoo! Inc. (NASDAQ:YHOO)’s ad revenue, and further suggests that inventory growth and improvements in revenue per search have bolstered the company’s ad sales, according to channel checks.
Goldman believes that weak expectations for search and display ad sales could lead to a strong post-earnings performance as the firm raises its revenue expectations for the company’s largest segment. However, for a company with zero growth, I simply cannot validate its price/sales ratio of 5.63. Goldman notes that low expectations could be favorable for the company, and investors, but after a 70% one-year gain I tend to believe that expectations are higher than what the firm realizes.
Final Thoughts
Clearly, my choice from these top three market-moving upgrades is Facebook Inc (NASDAQ:FB).
While I like the reasons for both Yahoo! Inc. (NASDAQ:YHOO) and Freescale Semiconductor Ltd (NYSE:FSL), I cannot discount Yahoo!’s lack of growth and its large run higher, nor can I discount Freescale Semiconductor Ltd (NYSE:FSL)’s massive debt load.
Facebook Inc (NASDAQ:FB) has went from being one of the most talked about tech companies, to a near under-the-radar play, as retail investors pay close attention to the likes of Yahoo! Inc. (NASDAQ:YHOO), Google, Amazon, and Apple.
At 10.88 times sales, I think Facebook Inc (NASDAQ:FB) is priced attractively in a space that is historically expensive. I also believe that because of its large user base that there is a lot of room for the company to grow larger, and that increased momentum would answer a lot of questions into this earnings season. Thus, I’d watch the stock closely over the next couple months.
The article 3 Most Bullish Upgrades From Tuesday originally appeared on Fool.com and is written by Brian Nichols.
Brian Nichols is long FB. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
