I always get a kick out of stock analysts. It’s a weird job: you’re paid a lot of money to talk about an industry you’ve never worked in and model the future profits of companies you have no inside knowledge of. And on top of it all you have a profound impact on the companies’ share prices (having worked at two publicly traded corporations I can tell you that our CEO’s cared what the analysts said).
Most of the time it’s nothing new with these guys; they tend to exhibit herd behaviour. However, sometimes I’m surprised by what they say. Check out this recent article in the New York Times on Verizon. It’s all about the FiOS program (running fiber optic cable to houses to replace copper and provide practically limitless data transmission speeds) and whether it’s a good or bad idea.
The numbers thrown around are pretty substantial: Verizon’s spending $23 billion to roll this thing out, so lots of analysts are trying to figure out if it will make money. One of them states:
“If I were an auto dealer and I wanted to give people a Maserati for the price of a Volkswagen, I’d have some seriously happy customers,” said Craig Moffett, an analyst with Sanford C. Bernstein. “My problem would be whether I could earn a decent return doing it.”
Moreover, he figures they’ll be $6 billion in the hole at the end of the day. But who cares if Verizon loses money on this? They’ve already sunk four and half years of costs into this thing (the roll out started in 2003), so if you’re investing now, you stand to make a good return. This isn’t lost on Craig’s peers at Bank of America:
“If you are an investor today thinking about what the prospects of FiOS are tomorrow, you don’t look at what has been spent. You look at what needs to be spent,” Mr. Barden said. “The 2008 investors owe the 2003 investors a debt of gratitude because the 2008 Verizon is in a vastly better competitive position than it otherwise would be.”
So there you have it. Two analysts looking at the same stock. One saying it’s a waste of cash as it’ll never break even and the other saying that all the costs are sunk so it’s worth a lot more than people think.
Like I said, I always get a kick out of stock analysts.