Invested in the Narrative
- Joshua M Brown
- September 22nd, 2012
It's gotta suck to be a sell-side analyst, you almost can't win in the end.
Here's a case in point:
Let's say your firm is supposed to be this West Coast, tech-savvy, Silicon Valley-courting investment bank and so the ratings on the tech stocks you cover are pretty much going to have to be at least somewhat salutary. And then something like Facebook comes along and you know that your job is to give it a big, sloppy wet kiss. No, the boss didn't force you to, but you're not stupid. You understand that your role is equal parts analysis and marketing, they're certainly not paying you based on earnings estimate accuracy.
So you go out and you give Facebook that big kiss. You come out swinging like Michael Pachter did for Wedbush Morgan - the first analyst to slap a buy on Facebook way back on May 4th, he didn't even wait for the IPO. His price target? A hilariously hopeful $44. Based on hypothetical earnings per share of $2. In the year 2015. I'm not joking. And his thesis is a Hans Christian Andersen fairytale, laden with the words "opportunities" and "possibilities." Pachter rights cites the company's leadership position in users and traffic, then wrongly extrapolates that to mean actual revenues and profits.
He of all people should understand the reality that social media companies are great at disrupting other people's businesses but terrible at finding profitability from their own endeavors. The story of Web 2.0 thus far has been 10 minus 5 equals 2.
Anyway, the company goes public a week after his call...you know what happened next.
So now it's a few months later and it's not like you can be bearish or "un-constructive" at this point. But you also can't be walking around going "Everything's fine! Super strong buy! We like it even more now!" And so you give a non-sequitur comment like this to a Barron's reporter, who probably laughs as he re-reads it with his editor:
"I don't understand management teams that don't explain how they are going to spend shareholder money," says Michael Pachter, an analyst at Wedbush and a Facebook bull. "Facebook is saying, 'Trust us.' Investors don't need to know about every pencil, but they want to know the strategy."
I'll sum that up for you - he's bullish but has no idea why. The story has changed but he can't, so he feigns vulnerability. "How can they do this to us? Tell us the strategy! Pwease!"
Let me help you, Michael. There is no strategy. But there's a lot of cash. So they'll throw it around until they figure something out. It'll be fine, "these are really smart people, they'll figure out revenue eventually."
I got out of the storybook side of the investing business years ago. I don't miss it much, and when I do I just think about episodes like these. More than anything, I pity the pros who are forced to be invested in this or that narrative. It always starts off better than it ends.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.