In my previous post, I lamented the decline in the business model behind traditional equity research. I think equity research can and should play an important part in the financial markets. Unfortunately, the current business model means that analysts are getting paid less and less, and talent is leaving the industry.
This idea has been kicking around in my head for a long time. Two recent events prompted me to finally put in writing.
The first was the fall of Gowex, a multi-billion bankruptcy that appears to have been a complete fraud. As Benedict Evans pointed out in a Tweet it is hard to imagine a company getting this big without equity coverage, and presumably that coverage would have unearthed warning signs much earlier. There are many more examples where limited or just plain weak research coverage let fraudulent companies bilk investors before getting uncovered.
The second topic was the recent debate over the valuation of Uber. First NYU professor Aswath Damodaran published a piece of FiveThirtyEight arguing that Uber’s last valuation of $17 billion was far overdone. Damodaran uses a good framework for this analysis, and his site has a lot of interesting reading. However, a few days later Bill Gurley, a partner at Benchmark Ventures, posted a response arguing the opposite, that Uber is worth far more and that Damodaran had made some wrong assumptions. Both sides used the same framework for their arguments, one that I would consider a pretty basic starting point for any equity analysis. I think Gurley got the numbers right, but both sides make valid points. The problem is that it is rare to see this kind of analysis anymore in equity markets. And as much as I believe Gurley is making a sound, honest analysis, he is an investor in Uber and thus an interested party. There is a broader problem in the markets when the best analysis is coming from interested parties.