How can so many analysts be off the mark in recommendations and target prices for Amazon.com? Aren't they the Harvard B-schools types that are paid six figure incomes to study these companies to a degree that private individuals would find impossible?
The first reason, one that is obvious to many on this thread, is that many analysts have a vested interest to their brokerages, the stocks they are supposed to have subjective opinions about, and institutional clients to support. Wall Street and government regulators have allowed this collusion of interests as a necessary evil to grease the investment banking and stock transaction mechanisms. You can question whether this vesting of power is appropriate in this age of electronic information and transaction, but it is the current way things are done and is unlikely to change much or soon. The internet will have a long-term effect of decoupling information and analytic capability away from the whore pimping leanings of the brokerages/investment banking interests but institutions will take a long time to change due to the mega bucks involved.
The other major reason that the analysts miss the mark is because of the prevalent methodologies they use, IMO. Analysts, or ANALS as I like to call them, are too easy to "model" new companies and industries that they have a vested interest in promoting based on the best posible portions taken from previous models. The ANALS (anal retentives) are always focused on the past to model their expectations for the future. In the case of the internet stocks, they look back at the meteoric growth rates and at past gross margins and then make bold predictions based on unreasonalbe assumptions. The reasoning goes something like this: "I spreadsheet the past growth rates of the company, which were 400%/year. Then I look at the long-term forecasts for internet and e-commerce growth rates which are 75% and 120% compounded over the next several years. Then I figure what the company's market share numbers are and where they might go. Because the internet is an incredible enabler of e-commerce, I have a high degree of confidence that e-commerce will grow at the predicted rates. Then I take the current gross margin number and figure that they will stay close to the same. Then I take a look at the expected costs of operations and economies of scale. Theses companies ad budgets and promotional costs won't need to grow at the same rate as sales and their fulfillment facilities will become more efficient to I figure greatly reduced overheads as business grows. I'll cut and paste some formulas and figures from other mass marketing companies in the retail sector that I have modeled to get to this part of the spreadsheet. I also assume that, despite the ease of entry and competition, that the inet market will be made up of a few leaders who will control a large percentage of overall sales (this despite studies and early results that indicate otherwise). The result is that Amazon.com and some other inet companies will be very profitable in five or six years."
What is conveniently left out of their spreadsheet models is the fundamental fact that the internet not only enables greater ease and speed with which to grow a business, but it also enables an incredible ease of competition and methods of shopping around and price comparison. But where do they pull those numbers and formulas from? Tha ANALS find that although several studies predict severe price competition that there are no forecasts (that I am aware of) that predict what the net effect will be on prices or gross margins. Because the industry and specific companies are in the market awareness and growth phase of business development, the effect of competition is muted in the huge growth rates. That tendency fits perfectly with text book examples of market influences that predominate during this period. But the ANALS have ignored the text books when it comes to analysing the impact of the internet on competition when the market quickly reaches a more mature phase of growth. It doesn't make sense to suppose that a beneficial internet enabled facility won't be a factor simply because it doesn't exist at a time when the market has yet to grow to make it very feasible. As the market grows the web Shop Bots and buyer informations services will proliferate. The early signs of this are already apparent but the impact is shaddowed by the overal growth of e-commerce. The IBM and Artur Anderson studies predict that web bots and price compeition will be a fundamental process that will greatly effect the structure of e-commerce, but it is very convenient to ignore these studies to predict best world results.
Maybe the brokerages are damning themselves as knowledge spreads that they are prejudiced and overpaid for their ignorance and that investors are better served by independent thinking and analysis - as many of the champs on this site have provided. |
