After the dot.com crash, the finger pointing started, reports Edward Hellmore
How the mighty have fallen. Little more than a year ago Jeff Bezos was flying high. The price of Amazon.com shares was in the stratosphere and the company’s beaming 38-year-old CEO was being lionised as Time magazine’s Man of the Year. Supported by the enthusiasm of fawning Wall Street analysts, Bezos like much of the Internet world could walk on water.
But no longer: as the Internet economy has collapsed, not even the golden calves of IT are immune to the sour mood of the market.
And no one is more out of favour than the Wall Street analysts whose every pronouncement “buy”, “sell”, “hold” investors once took as gospel. As the Nasdaq dipped markedly, the analysts who promoted the tech boom are being held responsible for the billions lost by investors, many of them individuals seduced into the markets by the lure of easy money.
Call it the blame game: the press blames the analysts, the dot.comers blame the venture capitalists, the venture capitalists blame the markets and almost everyone blames the media.
But it is the cheerleaders of the new economy analysts who are taking the heat for the collapse of technology stocks.
“The Age of the Analyst is dead,” proclaimed the New Yorker. “In the last five months the clued-in analyst has been exposed as clueless and the equity-analysis game has proved to be something of a sham.”
A year ago Morgan Stanley’s Mary Meeker was basking in adulation. She had been dubbed Queen of the Net by supporting Amazon.
She had been subject of a glowing profile in the New Yorker in 1999, named the third most powerful woman in business by Fortune (and put on the cover) in the same year and invited to speak at the World Economic Forum in Davos.
Meeker became the highest-paid woman on Wall Street with a reported base salary of $15-million a year.
Then there was Merrill Lynch’s Henry Blodget, Wall Street’s loudest cheerleader for Internet stocks. Named King Henry by the Wall Street Journal, the red-haired Blodget was an obscure stock picker before he predicted in December 1998 that Amazon, then trading at $240, could hit $400 a share within a year, pushing the stock up 20% in a day. That made him the media’s favourite Internet talking head.
From the day he burst into the headlines in 1998, Blodget has been mentioned 95 times in the Wall Street Journal, 66 times in the New York Times, 53 times in The Washington Post (which ran a huge profile of him last year) and 27 times in Business Week.
Since the beginning of last year he has been mentioned (or interviewed) on television 816 times.
Then the Internet bubble burst. Meeker’s stock picks Ask Jeeves, Drugstore.com, Priceline.com, Women. com have fallen by as much as 96%. Blodget’s top recommendations have plunged 79% including eToys and Pets.com, both of which have shut down.
The pair are rarely on television now. Meeker hasn’t been on CNBC since October. The New York Times says Blodget and others like him need to go “a long way toward explaining why the market for technology stocks has crashed”, despite the fact that, like many, they have now changed their tune.
But the story of how Meeker, Blodget and others encouraged investors to bid stocks up to levels they now admit were unjustifiable goes a long way toward explaining why the market for technology stocks has since crashed.
Looking back a year after the peak, it is clear that prices hit astronomical levels in part because of a euphoria infecting not just day traders but giants like Merrill Lynch.
“When someone appears to be right, they become larger than life,” says Peter Bernstein, a veteran consultant to big money managers.
As the Nasdaq soared, it was considered imprudent to get too particular about business models, let alone poke around at individual valuations. After all, Amazon’s stock, like so many Internet stocks, relied on the dreams of small investors fed by upbeat TV sound bites from Blodget, Meeker and the rest. And Amazon, perhaps more than any other firm, had a lot to thank the analysts for and a lot to lose if the sentiment reversed.
Take Amazon: within weeks of its initial public share offering in May 1997, the company was trading below the offering price and Wall Street wags had nicknamed it Amazon.bomb.
But by the time Meeker started promoting it three months later, the Internet was becoming a mass phenomenon, not just a gathering place for geeks. Amazon, Meeker wrote, “is the leading retailer/merchandiser on the Net”.
“The great paradox of the analyst’s reign was that, as their stature grew, the quality of their analysis plummeted,” noted the New Yorker.
“With few exceptions, analysts did not see trouble coming and didn’t warn their investors to get out of the way.”
For her part, Meeker says she was always worried about becoming a posterchild for dot.com mania.
“I did not aspire to be a media celebrity in any way, shape or form,” she says.
“I felt uncomfortable being in the limelight.”
Blodget, too, has taken a fall.
“Things change,” he said recently. “The market went from saying, ‘we like companies that are growing quickly but are losing a lot of money’ to saying, ‘We want to see earnings.’ It’s very hard to predict a 180 turn like that.”
But some heroes have emerged. Although seen as a heretic when other analysts were still feeding investor euphoria, a 29-year-old Lehman Bros analyst named Ravi Suria issued a scorching report in February saying Amazon would run out of money this year.
Suria had already set himself up as Bezos’s nemesis-in-chief. Last June the then-little-known analyst sounded the first warning, arguing that Amazon was showing the “financial characteristics that have driven innumerable retailers to disaster throughout history”.
His analysis created a sensation.
The company called it “hogwash”, and Bezos personally disputed the conclusions. Investors, however, voted with their wallets, sending the shares down nearly 20% in a day. At that time Amazon stock was trading at about $45, and has fallen ever since.
In theory, the report should have made Suria’s career. After all, Meeker and Blodget had become Wall Street and media darlings after writing about Amazon. But they, of course, were on the side of the vast e-commerce company that sells about 11% of all goods sold online and that along with the auction house eBay is probably the dot.com most beloved by its customers. But unlike eBay, the strength of Amazon’s balance sheet is constantly in dispute.
For Suria, who likes to smoke cigars and skydive, and lists an interest in imported bottled beer, taking on ever-sunny Bezos meant taking on the whole Internet economy.
Already irked by Suria’s warning in June last year, the subsequent report on February 5 started a war.
“Obviously, you can’t take this seriously,” Amazon representative Bill Curry said.
“It’s a silly report that’s chock full of errors.”
The New York Observer said Amazon went to considerable lengths to quash Suria’s predictions. When Amazon executives learned of the report’s harsh nature that the spectre of bankruptcy was being raised they leapt to the phones. They held up publication for 10 days, it is claimed.
Whether Suria’s predictions prove right or wrong (in the aftermath of his report, half a dozen Wall Street analysts have downgraded Amazon shares, some even saying the company may still be overvalued) he may have changed the nature of the tech analysts’ trade.
“Whether or not the Lehman analyst is right to take a bearish stance on Amazon.com, give him credit for taking a much-needed sceptical [sic] stand,” said TheStreet.com.
Of course, Bezos strongly denies Amazon is in trouble. But the company has been getting bad press for plans to make severance packages for about 1 300 employees laid off last month conditional on their continued silence with a “non-disparagement” clause.
And, this month, Bezos completed his third sale of small portions of his Amazon holdings, which total more than $1-billion at current market prices.
In late 1998 Bezos’s sales brought him about $23-million. Last May it was $20-million. This month it was $12-million.
And, in the wake of this latest report, even Blodget has downplayed expectations for the firm by saying: “still comfortable, but on alert”.
Suria is confident that he will be vindicated after months of having his credibility questioned; Bezos is adamant he will not.
“The company has never been in better shape,” he said recently.
The same cannot be said of the analysts’ trade.