Last year, while building my short thesis for NFLX, I read numerous research reports from reputable Wall Street firms. I was shocked at the sloppiness of their analysis and value conclusions. In most cases, the value conclusion was simply an arbitrary multiple on a future arbitrary operating metric (45x 2013E earnings; 25x 2014E EBITDA). While there certainly is (one must hope) some deeper underlying rationale to lead to their derived targets, one wonders whether they start with the end result and work backwards ("well, NFLX is trading at $250, and I minimize career risk by being wrong with the crowd rather than correct on the periphery, so let's see what we need to slap onto that 2014 number to get us to a $280 target"). Ex-post analysis on these prognosticators I trust would not yield favorable results.
With that in mind, I am now short Salesforce.com (NYSE:CRM), and as a result am back reading these reports to see what justifications the Wall Street analysts are using for their current valuations. In this process, I came across a piece two weeks ago from Richard Davis, an equity research analyst (and fellow CFA charterholder) covering enterprise software companies at Canaccord Genuity. His report compared Seeking Alpha to T.J. Maxx - cheap inventory that in most cases is worthless. He also found a cute Sergeant Schultz/Cheezburger meme to really drive home his point about the level of intellect and sophistication on Seeking Alpha.
I don't take particular offense to this, primarily because I have an existing career, and for me, writing on Seeking Alpha is somewhat a hobby but primarily a means to test my personal investment theses against a wide and diverse audience. Further, having a Wall St. analyst call out the content of this site as practically worthless is somewhat comical, given the unenviable track record his profession has in creating thoughtful and unbiased research.
So after taking SA to task on the site's juvenile and unsophisticated analysis, what does Davis do to support his $180 price target (as of 6/4/2012)? He rigorously applies a 41x multiple to his estimate of CY2013 free cash flow. This FCF estimate assumes no acquisitions, an assumption that has fallen on its face in recent years as Benioff has tried feverishly to reinvent his company through acquisitions at revenue multiples of 200+ (for Heroku) and 35-40 (for Buddy), among others. Absent financial alchemy generating margins exceeding 100%, these acquisitions seem certain to destroy shareholder value. That's beside the point, I suppose. The point is that for a Wall Street analyst to mockingly refer to the analysis on this site as barely above the consignment rack, and then issue research reports with such simplistic analysis strikes me as a bit unfair.
I'd love to see analysts like Davis build robust sensitivity analysis in their research reports. I can guarantee only the most optimistic assumptions get you anywhere near an equity valuation of $180 for CRM. But for Wall Street research analysts seeking to curry favor with the companies they cover (lest they be blacklisted from conference calls or diminish underwriting and M&A assignments for their cohorts on the other side of that ever so fickle Chinese wall), I won't hold my breath. Instead, I'll spend my time reading Seeking Alpha, Guru Focus, Value Investing, and other hand-me-down analysts.
Disclosure: I am short CRM.