Sometimes an analyst makes a call that stretches beyond reason, and I often wonder what reason goes into making such a call. On many occasions, these calls are simply “following the leader” behind other analysts, in an attempt to create mediocrity within the industry to satisfy the funds that employ such firms. In this piece, I am looking at three calls that fit into this category, all of which are hard to comprehend.
Workday Inc (NYSE:WDAY)
Shares of the cloud-based provider of HR software Workday Inc (NYSE:WDAY) rose 7.12% to $61.72 on Monday to new highs after Pacific Crest analyst Brendan Barnicle reiterated his “Outperform” rating and his long-term price target of $90. Barnicle joins 18 other analysts who cover the stock, seven “buys” and 11 “holds”, yet his $90 target far exceeds the $57.08 consensus.
Barnicle argues that the company could be worth as much as $15 billion based on its $50 billion addressable market, a market that Barnicle believes could grow to $70 billion by 2015. Furthermore, the analyst believes the stock should find long-term support due to its two founders owning 60% of the stock.
WDAY is the most overvalued stock in the market, with a profit margin of (47.53%) and a price/sales of 40.65! This insane valuation is based on growth of 100% year-over-year; meanwhile companies such as Questcor Pharmaceuticals Inc (NASDAQ:QCOR) and Jazz Pharmaceuticals plc – Ordinary Shares (NASDAQ:JAZZ) have greater growth and trade with price/sales ratios below 6.0 and are profitable with large “addressable markets.”
At this rate, Workday Inc (NYSE:WDAY)would have to grow by 100% and trade flat for three years just to share an equal value as the two biotech stocks mentioned, and who knows when the company will achieve profitability. Therefore, with perfection baked into the stock, it would be unwise and illogical for any investor to buy at these levels based on an “addressable market” when there is such better value scattered throughout the market.
Barnes & Noble, Inc (NYSE:BKS)
Shares of the troubled (book) retail store Barnes & Noble traded higher by 5.31% on Monday following a very speculative view from the website Barron’s. In the article, Barron’s makes a case that BKS is worth $19 a share and that much of this upside is based on the fact that Microsoft Corporation (NASDAQ:MSFT) “would be smart” to acquire the book retailer to jumpstart its retail business and to set up a store within-a-store to increase tablet sales. While this view is interesting and entertaining, it lacks substance, and is solely speculative at this point in time.