This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, we’re focusing on tech stocks, as analysts pull back on Facebook Inc (NASDAQ:FB) and Dolby Laboratories, Inc. (NYSE:DLB), but become more bullish on LogMeIn Inc (NASDAQ:LOGM). Let’s start with that last one.
LogMeIn signs up some more fans
Remote computer access software maker LogMeIn Inc (NASDAQ:LOGM) released its second-quarter numbers yesterday, reporting a $0.06-per-share loss despite growing revenue by 20% (to $40.7 million). Management promised to reverse the quarter’s loss as the year progresses, however, predicting full-year net income will at least match analyst estimates of $0.49 per share, and could come in as high as $0.52 per share.
Investors are therefore shrugging off news of the loss, and focusing on brighter days to come. Shares today are up more than 4%, helped in no small part by a series of three price-target hikes on Wall Street, from Wunderlich, Dougherty, and Maxim Group — who posit share prices ranging anywhere from $28 to $38 on LogMeIn Inc (NASDAQ:LOGM).
Unfortunately, it looks like only one of those analysts is close to the mark: Wunderlich, which has a hold rating on the stock, and sees its shares declining in value over the course of the year.
Why do I say this? Well, consider: From a GAAP perspective, the best case for LogMeIn Inc (NASDAQ:LOGM) this year is that it might earn $0.52 per share. That works out to about 57 times earnings… assuming the earnings come in at the very tippity-top of LogMeIn’s predictions. Meanwhile, from a free cash flow perspective, the $15.6 million LogMeIn Inc (NASDAQ:LOGM) has generated over the past 12 months works out to a price-to-free-cash-flow ratio of 46.
So the free cash flow picture on this one is better than GAAP makes it appear. Still, whether you see the stock’s multiple as 46 or 57 — either way, that’s too high a price to pay for a stock that grew revenue 20% last quarter, and that analysts see growing profits at a similar 20% rate over the next five years. In short, the problem with LogMeIn Inc (NASDAQ:LOGM) isn’t the lack of GAAP profits — it’s the too high price you’re being asked to pay for the profits LogMeIn will earn in the future.
Turning away from Facebook…
Turning now to the downgrades, we begin with Facebook Inc (NASDAQ:FB), the beneficiary of a huge 30% run-up in share price after Wednesday’s earnings release showed a 53% jump in revenue on surprising strength in mobile advertising. One analyst, however — Argus Research — seems to think Facebook Inc (NASDAQ:FB)’s run-up in share price moved too far, too fast.