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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Who's hot, who's not -- in tech stocks Wall Street treated investors to one big upgrade and one big downgrade in tech this morning, along with a more general "pick and shovel" play likely to outperform the market no matter who comes out on top among the big brand names. Let's take them in order.
First up, Goldman Sachs Group, Inc. (NYSE:GS) just got back from China with some important news for Apple Inc. (NASDAQ:AAPL) investors. As detailed in a report laid out by StreetInsider.com, Goldman is upping its rating on Apple contract manufacturer Hon Hai Precision, saying Hon Hai is "well positioned to profit from the second stage of smartphone and tablet growth," and will probably grow its business 7% this year -- largely because of Apple.
Rival Foxconn, on the other hand, is likely to lose Apple business as the company begins ordering lower-end, plastic-cased iPhones for the developing world market. (Foxconn has little competitive advantage in plastic casings).
This, according to Goldman Sachs Group, Inc. (NYSE:GS), is going to hurt earnings at the Chinese contractor. The real headline here, however, is what Goldman sees happening for Apple, based on what it's found out about Hon Hai and Foxconn. Namely, based on the trends in orders and shipments it's reviewed, Goldman believes Apple will sell 175 million iPhones in 2013, and 251 million in 2014.
This works out to sales grow rates of 28% this year, and an even more astounding 43% for next year. iPad sales, meanwhile, will grow 45% and 26% in the two years. Even with some slight decline in average sales prices (plastic iPhones costing less than metal-cased phones, and iPad Minis costing less full-size iPads), this still seems to work out to earnings growth far above the 19% number that Wall Street as a whole is expecting Apple to produce over the next five years.
What's it mean to you? At a share price less than 10 times projected earnings today, Apple's a bargain if it achieves only the 19% earnings growth that Wall Street expects. If it does as well as Goldman Sachs Group, Inc. (NYSE:GS) thinks it will, the stock's even cheaper than it looks.
The downgrade Now for the bad news. At the same time as Goldman is upping its faith in Apple, across the street at J.P. Morgan Chase, the analysts are cutting their projections for Amazon.com, Inc. (NASDAQ:AMZN).
According to J.P., Amazon's stock has been able to maintain momentum based on its maintaining a "stable gross profit growth [rate] of 40% in 2012." Problem is, J.P. foresees a "material deceleration in gross profit growth to 31% in 2013." Combined with slower unit sales in its core e-commerce business, this suggests that the consensus growth estimates on Wall Street -- 40% annually for Amazon.com, Inc. (NASDAQ:AMZN) over the next five years -- may be overshooting the mark.
J.P. Morgan is downgrading the shares to "neutral" in response to its findings, but investors today might want to go a step further, get ahead of the game, and sell right now.