Analyst With A Knack for Shaking Up Net Stocks
Henry Blodget Is Wall Street's Link Between Online Firms, Investors
By David Streitfeld
"Never misses an opportunity to grandstand."
People are always talking about Henry Blodget on the stock market chatboards, and they rarely say anything nice.
When the Merrill Lynch & Co. analyst downgrades a stock, that angers everyone who owns it. But if he recommends something, he gets in trouble with all those who have been betting on it to sink. Whether up or down, a Blodget report--invariably well written and often culminating in a letter grade ranking the company's prospects, as if he were some old-fashioned schoolmarm--tends to influence a stock's price. That means someone's always furious.
"You can't open your mouth in this business," he says, "without getting hit in the head with a two-by-four."
Blodget says he looked once at the chatboards, saw people saying things like they wanted to throw darts at him, and tried not to look again. He got "a little freaked out" the one time he was recognized in public. "It was in a restaurant. Someone said, 'Thank you, you made me money.' " He knew it could just as easily have been someone who lost a bundle.
If Blodget truly wanted a quiet life, he should have stuck to teaching English in Japan, which is what he used to do. He's the link between everyone starting Internet companies and everyone investing in them, the most prominent stock analyst at a moment when analysts have never been more powerful, more richly rewarded--or more beset by conflicting demands from the companies they cover and the wildly varied clients they serve.
Wall Street bigwigs have always moved the market on a macro level. When Henry Kaufman, managing director of Salomon Brothers Inc. in the mid-'80s, would comment on interest rates, it would affect the price of hundreds of companies. But analysts recommending specific stocks usually wouldn't shift their prices more than a dollar or so.
The Internet reversed all that, making it harder to influence the big picture but much simpler to goose individual stocks. Blodget is a regular on CNBC, works for the largest brokerage, covers the hottest sector, and has a silver tongue. Put these all together and you get "the Ax," Wall Street slang for someone who could, if he chose, chop a company down to size.
It's 5 p.m. in the analyst's surprisingly small office on the 21st floor of the World Financial Center. He's already flown to Pittsburgh and back for meetings with clients today, but his real work--an analysis of Amazon.com's latest quarterly earnings report--is just beginning.
Amazon is probably the best-known and most controversial Internet stock, as well as the one that made Blodget's reputation. The earnings were announced after the market closed at 4 p.m.; its executives are now spinning analysts in a conference call.
Blodget is multi-tasking--listening to the call, taking verbatim notes on his computer, making other notes in a spiral notebook on his desk, talking to some clients on the phone, e-mailing others, instant messaging some more.
"Is this going to get you all bullish?" e-mails a New York hedge fund manager.
"I think I'm bullish now," Blodget fires back. He adds that he likes the way Amazon is getting an ownership stake in smaller e-commerce companies in return for promoting them on its vastly popular site, and the way the retailer is now investing in international distribution. "I wish I had upgraded yesterday."
In October, after Amazon's previous quarterly report, Blodget had wearied of the retailer's endless postponement of profitability. He lowered his rating from "buy" to "near-term accumulate," which in the careful language of analysts is equivalent to the difference between "I love you" and "Let's be friends." The grade he gave the retailer: B-minus. Amazon immediately lost 7 percent of its value, or $1.6 billion.
But now Blodget's enthusiasm is back as he listens to Amazon chief executive Jeff Bezos talk in lucid tones, vowing that the record $323 million the company lost in the fourth quarter was the worst it's going to get. The company's core book business is profitable, Bezos proclaims, and the other operations will follow.
On the whole, Amazon's results are better than it had estimated when it "pre-announced" a few weeks ago. The company made itself look worse then, so it looks better now. "Sandbagged us," Blodget complains in an instant message.
Still, he tells a second client, this time on the phone, that "the call was very encouraging. The last couple of calls, Jeff has sounded like he doesn't give a [expletive] about Wall Street."
Now Bezos does, or at least is pretending to. And Wall Street is responding in kind. In after-hours trading, the stock is on its way to rising more than 12 percent.
"Idiot not to upgrade," Blodget confesses to a West Coast money manager. Between them, they rapidly exchange 68 messages, chewing over Amazon's accomplishment--gross revenue went from "0 to $2.5 billion in dead industry in five years," the analyst notes--but also the fact that any spike in the stock will likely be temporary, interest in e-commerce during these post-holiday months being only mild.
As the call is winding down, the analysts are patched in one by one to ask questions. "Jeff, I wonder if you can give us a little more color on international?" Blodget asks when it's his turn.
At 6:20 p.m., the call ends. Daniel Good, a Blodget deputy, is already at work on the basics of the Amazon report. Another deputy, Virgina Syer, comes in. She is crunching numbers for a report on AOL, whose subscriber growth appears to be lagging. This year, the company is on track to add 500,000 members in 33 days. Last year, it added 1 million members in 41 days.
"So it's almost the identical period, and they're slow," Blodget muses. This is potentially a turning point--not only for AOL, whose stock has been fueled by its tremendous growth in subscribers, but for the American Internet as a whole. Market saturation hasn't been reached, but it may be in sight on the distant horizon.
He's still working this problem when a group of Amazon executives call for a private chat. He switches his attention back to the retailer. "Where should we put the revenue [estimates] for the first quarter?" he asks the Amazon team, which includes the head of investor relations, Russell Grandinetti, and chief financial officer, Warren Jenson. "Are we okay on merger-related expenses? That's actually got to go up."
Amazon's team is upbeat, cool, informative without being particularly revealing. They give Blodget no secret information, just try to spin him with the usual rosy scenarios. Nevertheless, he is pleased. "I thought the conference call was great," he tells the team. "I think you'll reinstill confidence in a lot of people. We're going to upgrade."
The Amazon folks know exactly what Blodget is thinking because he's e-mailed them his financial model--an extensive breakdown of Amazon's past results and future expectations. "Feedback is valuable," the analyst says. "It's become so important for a company to beat expectations that they want to make sure they don't get out of hand."
Investors also like a company to beat forecasts. As a result, there's a tendency in models to keep expectations modest--to say that Company X will increase profits by 10 percent. Then the earnings come in, as usual, 20 percent higher. The stock jumps, and everyone but the short sellers are happy.
So on stocks such as Amazon, Blodget keeps a private model, too. This one doesn't incorporate feedback from the company. It's more speculative. It's also probably closer to the truth--even if it serves no one's interests to make it public.
As the relationship between companies and analysts grows ever more complex, it also becomes increasingly intimate. "The independence of analysts has clearly diminished over the last 15 years," Jeffrey Hooke, author of "Security Analysis on Wall Street," says in a phone interview.
"If an analyst gives a negative report on a company, he might be more candid than others, but he'll get cut off from information," Hooke added. "If he did that to multiple companies, he'd be unemployed."
Blodget naturally has a more upbeat view, equating the relationship of analysts and companies to that of a beat journalist and his sources. "You trust them and you know they trust you, and that's why you get good information," he says. Still, he concedes: "It helps to be on good terms with the company."
While all companies need analysts to provide a seemingly independent voice to endorse their actions to investors, this is especially true for Internet stocks, which trade at huge multiples and tend to be emotion-driven.
Just how emotional people can be on these stocks became clear to Blodget on Dec. 16, 1998, when he made the transition from a relative nobody--a 32-year-old analyst with the second-tier firm of CIBC Oppenheimer--to star. It took about two hours.
Nothing in his career so far seemed to put him on the track to fame, or even success. Blodget's father was a commercial banker and Henry had traded stocks for fun, but his degree from Yale was in history. "I was taught that business was destroying the world, and you have to save the world." His method of doing this was to teach in Japan, after which he unsuccessfully toiled for 18 months trying to write a book about it. A stint in journalism doing such things as fact-checking at Harper's magazine left him "absolutely miserable."
"I never got into a journalism situation that required a hell of a lot of intelligence," he says.
In 1994 he joined a training program at Prudential Securities and then began working in corporate finance--taking companies public. When he joined Oppenheimer two years later, he gradually began covering the emerging Internet sector.
"If you got an Internet browser the day before the guy next to you, you were an expert," he explains.
His track record wasn't perfect, but anyone following his advice to buy the leaders--Amazon, Yahoo and AOL--would have made a lot of money. It might have helped a bit that his reports were written with a grace and fluency not often found on Wall Street, which specializes in industrial strength prose.
But it still took his bold move with Amazon to make him a household name in the world of Internet stockholders. The retailer was at its most controversial then, full of swaggering ambition and bleeding red ink. It was also a hot stock, one that had doubled and redoubled. Two months earlier Blodget had put a 12-month price target of $150 on it. The stock quickly breezed by that to close on Dec. 15 at $242.
So he set an "outlandish" new target--$400. "I was trying to say, 'Stop asking me the price target. There's plenty of upside,' " he says. "But it was like I threw gasoline on a bonfire."
Blodget made his Amazon forecast public during Oppenheimer's "morning call," when the firm's analysts update its brokers on what they're recommending. Blodget was the last of the six analysts to speak, and Amazon wasn't even the first stock he mentioned.
"Oppenheimer has a value bias," he says. "I would have to talk about [Internet stocks] after a 10-minute evaluation of Rubbermaid, and its change from LIFO to FIFO inventory accounting practices in China."
A Bloomberg News reporter got a tip on Blodget's aggressive forecast, and wrote a story about it. A couple of minutes later, CNBC picked up the story, noting Amazon stock was already up $10 in early-hours trading. A few minutes after that it hit the chatboards, provoking hundreds of messages during the course of the day.
At 9:30 a.m., the market opened with Amazon at $259, up $17. It continued rising all day, the commentary making the stock climb, which in turn provoked more commentary. It was as if Blodget had been understood to say Amazon was going to go to $400 that day.
The stock closed at $289, up nearly 20 percent, on quadruple its normal volume. Those who thought Amazon was worthless seemed personally insulted by the rise. Jonathan Cohen, at the time the Merrill Lynch Internet analyst, said the stock was worth less than a quarter of its current price.
On Jan. 6, 1999, Amazon closed at $138. Since it had split three-for-one in the meantime, that works out to be $414. The stock had done in three weeks what Blodget said would take a year. The next month, Blodget replaced Cohen at Merrill Lynch, for a salary that he declines to discuss but is reported to be $4 million.
The events still bemuse him. He quotes Jay McInerney, who explained how he abruptly became famous with his novel "Bright Lights, Big City" in 1984: "I plucked the chords of the Zeitgeist."
The Net was just starting to enter the consciousness of the mass market. Mainstream investors were looking at their stocks and saying, "I'm underperforming." Day traders were ramping up prices.
"The reason stocks move is not because they're cheap or expensive," Blodget says. "It's because there's an imbalance of supply and demand. Stocks don't move on valuation."
Right and Wrong In Internet time, it was all ages ago. These days, there's more supply, both in the number of Internet stocks that are public and the number of shares they have outstanding, and less white-hot demand. Blodget sees Amazon as a $100 stock in 12 to 18 months, which would only bring it back to where it was two months ago.
And that's for a company he likes. Many of the weaker companies, he predicts, won't be around in five years. More and more, he stresses that many Internet stocks have to be bought for the long term.
"Our job is not to be stock pickers, but to be correct on trends, and help investors pick stocks," he said. "There's a significant difference."
It's a difference the market frequently misses. Last Oct. 22, Blodget downgraded the Internet infrastructure company Inktomi from an intermediate term "accumulate" to "neutral." (He kept his long-term "buy" rating.) It was the Ax in action: Inktomi immediately fell 15 percent. But within a month, it had nearly doubled.
"We were wrong on Inktomi," he says now. "It's very painful to be wrong, to say 'sell' and it goes up. It causes a lot of animosity with the company, with shareholders, and you weren't even right."
On Dec. 23, he upgraded again. The chatboards were predictably caustic.
Part of the difficulty of being an analyst now is that investors have such different horizons. Some still invest for the long term of five years, while to others "long term" literally means an hour. And the ever-increasing flood of information causes problems of its own.
Just assimilating it all, for one thing. "This job has changed a huge amount over the last 10 years," Blodget says. "Then, you never had quarterly conference calls. The company would put out a press release, the analyst would get it and call five clients. You wouldn't write a report."
Blodget and his team of seven associate analysts now write three or four reports a week on about 35 companies. "We're absolutely running flat out," he says. "At this pace, in another year or two I'll drop dead."
Says his colleague Syer: "He's stressed and inundated and over-stimulated. When you're in his office, you can hear the constant 'bling' of new messages on his computer. It's like listening to a torrent of rain."
On his desk are a stack of about 25 "While U Were Out" pink slips, a curiously low-tech method of keeping track of calls to return. "In New York Tuesday and Wednesday," said one dot-com executive. "Would really like to meet you." The Tuesday and Wednesday in question were a couple of weeks ago. "Will you speak at this gathering in San Francisco?" But the gathering has already happened. The folks from a big Internet mutual fund really want to have a chat. Someone launching a new Internet company wants to show Blodget his revised plan.
In random moments, he shuffled the slips like a deck of cards. But there's no time to return a call. Or answer e-mail. He cleaned out his basket completely a few days ago, and already has 720 unread messages. He doesn't even have time to decorate this office, which he's been in for almost a year. His possessions are in boxes on the floor or shoved under the desk.
It's 8 p.m. Nearly everyone at Merrill Lynch except Blodget and his staff seems to have left. The cleaning crew is emptying wastebaskets. Blodget talks to more clients. He studies the financials again. For the first time, Amazon has revealed what its quarterly sales per active client were: $116, up from $106 in the '98 quarter. More customers, each spending more--a very good sign.
Going to upgrade, he tells an assistant as he walks out the door at 8:20 p.m. Not that he expects Amazon to go up that much. "I think it's dead money for a while, but I want to differentiate it from all the pieces of [expletive] we have buys on," he says cheerfully.
He has a report to write, but first there's some socializing to do. Draper Fisher Jurvetson, the Silicon Valley venture capital firm, is having a party for its new New York office. In the cab, Blodget uses his cell phone to update another client on Amazon.
The music at the party is too loud to actually talk to people, so he makes a quick circuit of the room and leaves to go to his nearby apartment, stopping first for a couple of pieces of mushroom pizza. His girlfriend, a PhD candidate in film studies, is home. She's watching a favorite show, "Law & Order," which is good news; it means she won't mind if he goes and works.
But instead he gets sucked into the show, which means he doesn't get to work on the Amazon report until later. Since there's no couch yet and the desk is cluttered with boxes, he goes to bed and works there. Sometime after midnight, he tries to relax by making the next move in three chess games he is playing with a friend, but his brain refuses to function.
By 6 a.m. he is back in the office, finishing the report. "This life is totally grueling, totally unsustainable," he notes. He doesn't drink coffee, but fuels himself with special high-octane tea. Except the cleaning crew apparently threw out his supply. This is the closest he gets to a crisis.
At 7:02 a.m. he finishes the report, assigning Amazon an "A-minus" grade and upgrading to "buy," and sends it to the legal department for clearance. By 7:04 a.m. he is in Merrill's auditorium, ready to participate, as he does about three times a week, in the morning conference call for the firm's 15,000 brokers and salespeople. "SMILE," he writes in a note to the colleague on the stage next to him. Blodget may be half dead, but he's still having a good time.
Blodget is Merrill's most famous analyst, but he still doesn't go first on calls. At 7:10 a.m., his turn comes. In downgrading Amazon last October, he says, "we sent a message and they answered that message. . . . The tone has definitely changed. If I characterized it, I would say it was much more adult."
As for AOL, he notes that the pace of bringing in new subscribers in the United States appears to be slowing, and that the growth in overall new Internet users appears to be dropping as well. "This is going to lead to a pretty big shakeout," he warns. "You can no longer count on a rising tide lifting all boats."
At 7:41 a.m. he goes to the vast Merrill trading floor to do a Webcast for the broker's Internet site. He stares at a camera 20 feet away, repeats the same points he has been making for 15 hours now. He's a born salesman: clear, concise, effective.
And so it goes, through the morning. The Amazon report goes out to clients, brokers and the media. So does the AOL subscriber report. Megan Smith, the chief executive of the gay site PlanetOut, stops by to visit Blodget.
Merrill is in the running to do the underwriting for the site's initial public offering, which makes this another conflict. If Merrill gets the job, Blodget will later be issuing reports on PlanetOut, and when was the last time an analyst was less than upbeat about a company his firm just underwrote?
"It's never happened," says author Hooke. "Any analyst whose firm does major investment banking work--and nearly all of them do--is suspect. I don't know why the SEC doesn't ask these firms to spin off their research operations."
Blodget admits that, for many analysts, "There's certainly a tendency to give the company a benefit of the doubt." But he argues that "the best analysts find a way of balancing the needs and wants of their constituencies. It's like being a good politician."
By noon, he is essentially done with Amazon. A good thing, too--the afternoon is full of meetings, interviews, conference calls. But first, he says, "I gotta go get some tea or I'll pass out."
On Feb. 23, after America Online stock had fallen below $50 for the first time since announcing its acquisition of Time Warner Inc.--provoking increasingly loud questions about whether the deal itself was in jeopardy--Blodget and his colleague Jessica Reif Cohen issued a report.
It was the first report from any analyst on AOL Time Warner, and was unambiguously enthusiastic. AOL stock was the most active on the New York Stock Exchange that day, jumping 17 percent. The Ax had spoken. People may still question the wisdom of the deal, but no one any longer thinks there's a chance it will fall apart.
On March 21, Blodget and Syer issued another AOL report, saying the acquisition of new subscribers had picked up again, making the fall-off they noticed in February a fluke.
No decision has yet been made on whether Merrill will be among the PlanetOut underwriters.
As for Amazon, it's drifted, just as Blodget predicted. But other Internet and high-tech stocks have undergone a fair amount of carnage, culminating last week in a brutal sell-off. Blodget is unfazed.
"I fully expect pullbacks like this," he says. "They're healthy. Too much food makes people fat and lazy. Likewise, when everyone is making money, something is wrong. I've always been very optimistic about the strongest companies, and horrendously pessimistic about the vast majority of companies. And that's being borne out. We'll see a lot of failures this year."
Blodget believed in the Internet when few on Wall Street did, and believes in it now when the general inclination is to dump the sector as fast as possible. Give him an "A" for consistency, at least.
He Spoke, and the Markets Moved
Henry Blodget's word became gospel to some investors -- but he has been known to be wrong. America Online and GMGI benefited from recent benedictions, but Inktomi -- victimized by a Blodget downgrade -- has rebounded spectacularly.
Feb. 22 $49.62 1/2
Feb. 23 $58.31 1/4
Friday: $67.43 3/4
Dec. 20 $111.09 3/8
Dec. 21 $135.12 1/2
Oct. 21 $60.25
Oct. 22 $51.53 1/4
SOURCE: Bloomberg News
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