Now that the snickering about infamous Internet analyst Henry Blodget’s newfound caution on Net stocks has died down, it’s worth pausing to try to put Blodget in perspective. Does this recent fall from grace mean Blodget has lost his touch? That he never knew what he was talking about in the first place? Or does it just mean that like any other analyst, he has his ups and downs?
Blodget, of course, is closely associated with the remarkable rise of Amazon.com’s share price. On Dec. 15, 1998, Amazon closed at $242 3/4 The next day, Blodget predicted that Amazon shares would rise to $400 over the following 12 months; AMZN rose more than 46 points that day to close at $289, and surpassed the $400 price target in about three weeks. For Blodget, this wasn’t just a newsworthy call; it was a huge branding event. He became an instant Internet wise man and jumped from CIBC Oppenheimer to Merrill Lynch.
As others have noted, however, Amazon’s share price hasn’t held up. The details are confused by two subsequent stock splits, but it’s worth walking through the numbers. Amazon split 3-for-1 in January of last year and then split 2-for-1 in September. Adjusted for these splits, Amazon was trading at about $40 1/2 before Blodget unveiled his target price of about $67 a share. Today it’s at a little less than $32.
What’s remarkable about all this isn’t that Amazon shares are now 20 percent below their price when Blodget first made his prediction. It’s how squishy that prediction was to begin with. Immediately after making his call, Blodget noted that “Amazon.com is a long way from proving that it will ever make money, and investment in the shares clearly requires a strong stomach and a great deal of faith.” That’s a big caveat. But at the time, maybe it wasn’t all that surprising. Maybe the implied message–the business may not work, but the stock seems likely to fly for a while–was pretty much in step with the thinking around Internet stocks at the time.
Obviously, the thinking has been different lately, as Blodget’s rejiggering of his recommendations earlier this week demonstrates. He downgraded 11 of the 29 stocks that he follows; every one of those 11 stocks has fallen at least 60 percent from its 52-week high. Among the standouts are Pets.com (90 percent off its high), iVillage (off 88 percent), and eToys (down 95 percent). It’s often been observed (in Moneybox, among other places) that plenty of stock analysts have a habit of downgrading stocks that have already been whacked, which isn’t very helpful. But the extremeness of the numbers in this instance is what has attracted so much attention.
Blodget’s revised ratings are in effect a belated admission of what practically everyone now claims to have known all along–that a stock price actually does have some relationship to the underlying business and that many dot-coms were trading purely on speculative froth. But the era of speculative froth lasted a surprisingly long time, and perhaps it’s fair to say that Blodget’s optimism on Amazon probably was the best call anyone made during that period. At the close of trading on Dec. 16, 1999–12 months after he set his split-adjusted $67 price target–AMZN was at just under $95 a share, or nearly 41 percent higher than he’d said it would be. (And it’s worth noting that Blodget’s predecessor at Merrill Lynch had set a bearish split-adjusted price target of about 8 1/3 on Amazon shares, well below its price even now.)
The open question is how Blodget will hold up in a market that’s less forgiving of logic that allows one to predict a company’s stock will soar while simultaneously shrugging at its business model. He has shown that he can pick successful stock in the short run; the test will be whether he can spot successful businesses. And he may well be good at it. The point is, now’s the time to wipe the slate clean of the old Henry Blodget’s predictions and start evaluating the performance of the new, post-mania model. Then we’ll get a truer picture of whether Blodget is someone who can really see beyond the froth, or if he was just another one of the froth’s fleeting creations.