This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines feature new buy ratings from Barclays Capital for Zillow Inc (NASDAQ:Z) and Yelp Inc (NYSE:YELP) — but not for VistaPrint Limited (NASDAQ:VPRT). Let’s find out why not.
A buyer’s market for Zillow?
Barclays began the day with a new “overweight” recommendation for Internet realty information site Zillow Inc (NASDAQ:Z) — not that you would know it from the stock’s subsequent 3% drop. According to Barclays, Zillow Inc (NASDAQ:Z) shares will be worth $115 apiece a year from now. But so far, investors seem to be taking Deutsche Bank’s advice more to heart — and according to StreetInsider.com, although “Zillow has done an excellent job building a real estate asset spanning listings, mortgages, and home improvement with the largest audience in the space,” the stock’s valuation of 21 times sales makes Zillow Inc (NASDAQ:Z) “the most expensive stock in our universe.”
That’s a backhanded compliment if ever I heard one. So… who’s right? Barclays, or Deutsche?
Honestly, I have to side with the Germans this time. Priced at $95 and change today, Barclays is predicting a 20% profit for investors who buy Zillow today — but I think the shares are already pretty pricey as-is. With $6 million in trailing free cash flow, more than $11 million in GAAP losses, and $152 million in annual sales, Zillow Inc (NASDAQ:Z) shares cost an astounding 555 times FCF, which almost looks cheap when set beside Zillow’s P/E ratio of “infinity.” Price-to-sales, which works out to either 21 times sales according to Deutsche, or 22.6 times sales according to Yahoo! Finance, looks similarly sky-high.
Long story short, there’s really no good way to make a valuation-based argument in favor of buying Zillow today. Best I can tell, putting money in Zillow Inc (NASDAQ:Z) at these prices is sheer speculation — and not “investing” at all.
They “Yelp” for help
Believe it or not, Barclays’ other buy recommendation today looks even worse than Zillow. Priced just under $62 today, Barclays thinks Yelp Inc (NYSE:YELP) shares will fetch $64 a year from now — a potential profit of a whopping… 3.4%.
That hardly seems an adequate a return on your investment, though, given the risks inherent in this stock. Losing money like Zillow, selling for more than 20 times annual sales (again like Zillow), but unlike Zillow burning its cash (with negative free cash flow of $3.1 million), Yelp Inc (NYSE:YELP) stock is so fantastically overvalued as to make Zillow investors look conservative.
Regardless, a double dose of Wall Street confidence, which sees both Barclays and Deutsche endorsing the online urban ratings guide as a buy candidate this morning, has Yelp Inc (NYSE:YELP) investors howling at the moon today. Shares are up nearly 5% as of this writing — but I think investors who follow Wall Street’s advice on this one will rue the day.