Vetr Blog

Crowdsourced price predictions for the stock market.

Microsoft: Two Roads Diverged in a Wood

Jefferies & Co’s initiation of Microsoft ($MSFT) at Underperform on Friday took the wind out of the stock’s sails on what would otherwise have undoubtedly been a good day. Analyst Joe DiFucci slapped a $40 target on $MSFT, nearly 20% below the stock’s current level, due to in part to the stock’s strong performance this year (up 27% year to date, 12% since the October low) but also due to the thesis that demand for personal computers will continue to slide, Windows 8 was a dud, and Microsoft doesn’t have any immediate tricks up its sleeve. Meanwhile, the company’s $7 billion purchase of Nokia’s legacy phone business is increasingly looking like an albatross.

On the other hand, the company’s Surface tablet has slowly gathered momentum, reaching positive gross margins last quarter, and the company’s cloud products are unequivocally shining. Office360 is the jewel in the crown, growing users to 7.1 million from 5.6 million in the third quarter, and nearly doubling the commercial license count. The shift to the cloud will only accelerate, which means the company’s lock on business productivity software provides an effective monopoly in a very loyal and profitable segment. Even legions of Gates-hating Macintosh owners use Word, Excel and PowerPoint every day.

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DiFucci suggests that the stock’s gain this year takes all this into account. Moreover, a portion of it is attributable to cost cutting and the market’s early expectations of new CEO Satya Nadellal. The go-forward fundamentals remain challenging, with the difference that the stock now has quite a bit of air under it.

78 Vetr.com users are following Microsoft, with 19 active ratings split between 36% buys, 21% holds and an eye-popping 42% sells. It is rare indeed to see the ratings on such a popular stock diverge so completely. Expectations are both tepid and inverted – the average 6-month price target is $52, only 8% higher than the stock’s current price, while the $47 12-month target is actually slightly lower than the current price.

From a contrarian perspective, the high number of sell ratings on such a bellwether tech stock suggests Microsoft may have a lot more room to run. For what it’s worth, in October 15 Wall Street analysts rated $MSFTa buy or strong buy, a whopping 17 rated it a hold, and only three rated it a sell. The Wall Street penchant for playing it safe – no one ever got fired for buying Microsoft – seems to be alive and well.

What do you think about $MSFT? Should investors buy the dip, or steer clear? Make a rating!

Promo Wars: Is Facebook Squeezing too Hard?

Facebook ($FB) is one of the most popular stocks on Vetr.com, and is included in nearly one in four user watch lists. Accordingly, we pay attention to $FB. And last week, the company decided to do something that many users applauded, but left many analysts scratching their heads: They tightened up their promotion policies.

The move to restrict promotional posts in your news feed is not what you think, however. Instead of the normal gripes from users about paid advertisements (“sponsored” is the new word), this move focuses onunpaid, yet promotional in nature, posts. In other words, organic posts that people (and companies) write on their walls for all to see, but that are actually trying to sell something. Unsurprisingly, companies have become adept at social media, and these posts usually try to get you to download an app, play a game, buy a product, etc.

On the one hand, this cleans up the news feed feature of $FB and will result in less intrusion into your social ecosphere. Users will like it, which is a win for Facebook as it tries to avoid the “evil” moniker that somehow gets bestowed on technology companies that get too large.$FB itself is undoubtedly thinking that by shutting off the countless companies that have relied on $FB for essentially free advertising, they will drive some number of them to actually pay for what they have previously enjoyed for nothing.

But there is a risk. These activities increase traffic, build interaction, generate buzz and undoubtedly resulted in some companies becoming paid clients of Facebook anyway. Instead of bringing $FBclients, the move may actually cost them business down the road.

There is also the minor concern about why, exactly, $FB is taking this stance now. Is sales growth getting harder to come by? On the surface, things are fine; revenues last quarter were up 59%, users are still (amazingly) growing at a double-digit pace, the balance sheet is strong and valuation metrics are attractive. Nonetheless, the idea of squeezing out promotional posts seems a little unnecessary, especially given the outlook.

$FB earns three stars (hold) on vetr.com, spread across 23 ratings. With an average 12-month price target of $92.20, our users feel there is still upside for the company, but they’re not ragingly bullish by any stretch.

Wall Street has a penchant for pricing future goodness into current prices. What do you think about Facebook? Is the stock a buy from here?

Disclosure: At the time of this writing, Vetr had no position in the equities mentioned in this report.

$TSLA – Momentum Darling or Overvalued Automaker?

Tesla’s ($TSLA) is the second most-watched company after Apple on Vetr, and the company is up nearly 60% so far this year. Accordingly, the company’s quarterly numbers yesterday got us thinking about momentum and momentum stocks.

The most interesting thing about momentum stocks is that they can defy logic to an extraordinary degree. Traditional measures of valuation go completely out the window when Wall Street decides it is in madly in love with a stock. We’ve seen this time and again, and the refrain is always the same; valuation doesn’t matter with growth stocks. Growth is what matters with growth stocks.

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That is, until valuation matters. Then it tends to matter a LOT, and overnight. Wall Street, as any veteran trader will tell you, is a notoriously fickle companion.

$TSLA’s revenue and earnings were a bit better than expected, which inspired legions of the Tesla faithful to reassert the stock’s rosy future. But at the same time, $TSLA looks increasingly like the quintessential momentum stock – just as no one is buying a Tesla because they want to drive an eco-friendly car, no one is buying this stock because they think it is a bargain. They betting on further momentum.

The company’s decision to lower December delivery guidance by 2,000 vehicles is being described as being wrong for the right reasons – the company can’t build cars fast enough to meet demand. Sounds great, right? But among other issues, this was the second quarter in a row that estimates were lowered, while the launch of the Model X was delayed for the fourth time and is now not expected until the end of next year. Although a tech genius, Elon Musk is being confronted with the very pedestrian manufacturing, tooling, labor and engineering problems that have bedeviled every automaker since Daimler. He’s learning that it is exceedingly hard to make a lot of something consistently well and on time.

Meanwhile, $TSLA’s valuation metrics don’t leave much room for error: the stock is trading for 77 times 2015 earnings estimates, 12 times trailing annual sales and a PEG ratio of 4. By any yardstick, the stock is overpriced and has discounted near-term growth to a significant degree. Yet each of the three major corrections in the stock price since 2012 was ascribed to overvaluation, and Tesla went on to set new highs. Clearly, popularity is trumping math, and as those old Wall Street hands will tell you, momentum stocks can continue their uptrends much longer than you think possible.

Tesla is present in well over 50% of the watch lists on www.vetr.com, so the company obviously resonates with our growing user base. It has redefined the modern car, and Musk has a track record of being right, so it’s tough to bet against the company. Yet it is also hard to deny that much of $TSLA’s immediate potential seems be baked into the price.

What’s your take? Is $TSLA a $400 stock waiting to happen, or is it one production hiccup away from sub-$200?

Disclosure: At the time of this writing, Vetr had no position in the equities mentioned in this report.