The Lessons of Paypal & Tesla
The Sell-side will lead you up and down the Mountain
Many readers have been asking when this market “mania” will end or if it ever will with the brokerage house analysts constantly pumping and raising their price targets on whatever stock is moving higher? SMCI target went to $1000 this week, NVDA target to $1200, no wait, how about Morgan Stanley on Eli Lilly with the “it can be” the first $1 trillion healthcare market cap! Is business changing as quickly as the price targets? Very unlikely, if at all.
Ok, first, remind yourself that 95% of sell-side analysts have never managed money. They are essentially paid shills for the banking and trading arms of their firms. Yes, many have industry expertise, add value doing surveys but the least valuable aspect of their jobs really is their stock picking. Equally, they do not get fired (often) for being dead wrong and they hide behind overall market declines for explanations on why their buy rated stocks didn’t work. Fortunately, bear markets happen less often than bulls, so less mea culpas (if any). Lest we forget, the current 3P (3rd party) tracking work that moves stocks as if they were company press release updates. You know from the Yipit, M Science and Cleveland Research types. Does anyone keep track of the accuracy of these prognosticators?
Recently we started keeping a tally of the 3P hit rate, stock by stock, on their calls. For example, Cleveland Research sent a note to clients before the Cisco quarter was reported with an uptick in mind, writing:
Jan-Q orders viewed as directionally better vs. Oct-Q and our mid-Q work; we view orders down ~8% Y/Y (vs. mid-Q work ~15% Y/Y declines & Oct-23 orders -20% Y/Y)
Similarly, M Science was dead wrong on the recent Roblox quarter “weakness”. And, who can forget how inaccurate Yipit has been on the Amazon and Microsoft AWS metrics? Sure, I can find stock calls where the sellside or 3P players were correct. But isn’t that like a broken clock is right twice a day?
Again, all of this is in an attempt to answer the question when might some of this mania, lack of analysis or attention to valuation come back to some normalcy? Well, let’s review Tien-Tsin Huang from JP Morgan on Paypal and then Adam Jonas from Morgan Stanley’s track record on Tesla.
Paypal was a Covid darling given WFH and shop from home with account growth that grew exponentially for 18 months, until it didn’t. As you look at the chart, focus on the solid yellow line which is the 12 month price target set by JP Morgan on Paypal at every written update from the analyst (B equals Buy write up). Well, a buy the entire way up and a buy the entire way down including to this day. At $327, I am sure he wrote some compelling rationale for the continued BUY rating.
Adam Jonas has been equally useless in his coverage of Tesla, except he hasn’t bothered to lower his price target of late from $345, choosing not to react to the subpar results, down year over year earnings and just focus on the DOJO computer opportunity. Wait, Elon Musk described this on the last conference call as a “long shot” casting doubt himself on its commercial viability. Who needs facts! Adam just tweaked down his price target as it seemed rather silly at 2x the stock price.
Well, I have some bad news for you (and us). Drum roll please…………..