On Friday, analysts upgraded three of the more controversial stocks in the market. These stocks have all seen massive gains in 2013. With that said, why upgrade now?
Does Growth Warrant Valuation?
LinkedIn Corp (NYSE:LNKD) soared 10.6% to new highs on Friday, despite showing further signs of decelerating year-over-year revenue growth. The company posted a strong quarter that met expectations, but guidance was soft.
Cantor was one of three firms to upgrade LinkedIn Corp (NYSE:LNKD) on Friday, although most firms issued a revised price target. Cantor’s decision to raise its target from $170 to $250 was based around their expectations for 30% intermediate/long-term revenue growth.
While a 30% intermediate/long-term growth rate is impressive in itself, the question is whether or not such a growth rate validates a price/sales ratio over 21. In comparison, Facebook trades at 14.5 times sales and is seeing accelerated year-over-year growth, and with the same expected growth rate.
To me, Cantor’s price target hike was more based off the stock’s positive momentum and less on its growth rate. After all, I don’t know of many 30% growth rates that warrant a 21 times sales valuation. Thus, I think it was a bad call, and I would not buy at these levels.
The Potential Is Present, But Is It Too Pricey?
Yelp Inc (NYSE:YELP) exploded to new highs on Friday after a week where it gained 35%. The stock has now returned over 200% in 2013, yet JPMorgan and Needham are still saying “Buy.”
Last week, Yelp Inc (NYSE:YELP) released earnings and showcased 69% year-over-year revenue growth, including 77% growth in its local ad revenue. JPMorgan was impressed with the company’s ad revenue, and believes that the company is continuing to steal share from Yellow Pages. On the other hand, Needham is impressed with the company’s move to Europe, expecting this business to pick up steam in the second half of 2013.
Unfortunately, the same argument for LinkedIn Corp (NYSE:LNKD) applies to Yelp Inc (NYSE:YELP). The stock is trading at 21 times sales, and despite Needham’s bullishness, their price target is $5 below Yelp Inc (NYSE:YELP)’s current price of $57. With that said, I do like Yelp Inc (NYSE:YELP)’s business model of advertising and reviews more than I like LinkedIn Corp (NYSE:LNKD)’s business marketing space.
It seems logical that large advertisers would be attracted to Yelp Inc (NYSE:YELP) and its business reviews, versus LinkedIn Corp (NYSE:LNKD) and its low user engagement. With that said, I do think Yelp is expensive, and I think Needham’s target is reasonable, although I do acknowledge that Google has earned many billions in advertising, and believe the potential is present for Yelp.
A Change Of Heart!
Groupon Inc (NASDAQ:GRPN) was on Evercore’s Conviction Sell list as early as February of this year. The firm has always questioned the company’s reliance on up-front payments for daily deals to be cash-flow positive. For the most part, Evercore has been right at every step of the company’s post-IPO cycle, predicting billing drops, negative cash flow, and lavish marketing expenses.
Therefore, we must take notice when the firm upgrades Groupon Inc (NASDAQ:GRPN) to Equal Weight with a price target of $8 following the company’s management and business structure changes. The company’s initiatives to expand Groupon Inc (NASDAQ:GRPN) Getaways and its local business offerings have paid dividends.
The company’s growth now looks sustainable, and at 2.5 times sales the stock is not expensive. With that said, Evercore’s $8 target seems reasonable, as this year is crucial for Groupon Inc (NASDAQ:GRPN) in establishing its future, and there could be bumps along the way.
Final Thoughts
Personally, I find the LinkedIn upgrade to be very emotional, coming after earnings and dismissing a very excessive valuation.
Yelp’s call is responsible, with cause, and takes into account valuation due to the target being below its current stock price.
Yet, the call I am most impressed with is by far Evercore’s. Like I said, Evercore has been right every step of the way, and has done something that very few analysts practice, which is calling against the trend and changing their outlook based on changing fundamentals.
This practice is something I discuss in great detail in my book, and Evercore is practicing it to perfection. With that said, I think Evercore’s call is an indication that it’s time to watch Groupon Inc (NASDAQ:GRPN), which I believe would be wise.
Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends LinkedIn. The Motley Fool owns shares of LinkedIn. Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article 3 Friday Upgrades: What Do These Analysts See? originally appeared on Fool.com is written by Brian Nichols.
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