The past 10 years have been a difficult time to be an Internet analyst on Wall Street. I worked on sell side research from 2004 though 2007, doing data acquisition deals and research sales at Majestic Research and DeMatteo Monness. By the end of my time on Wall Street, there were only a few large public, pure-play internet companies: Amazon, eBay, Google, and Yahoo. Four names do not make for an active coverage universe for a buy-side analyst. In fact, by 2007, most hedge funds had merged their media teams with their internet teams. Many Internet analysts were covering video game stocks (THQ, Activision, Take Two, etc). Some started covering casino stocks, given the similarity between casino models and online service user models. I started seeing a lot of internet analysts become CMT (Communications Media Technology) or TMT (Technology Media Telecommunications) analysts. If you loved covering Internet stocks, you were a man or woman in the desert on a horse with no name.
And so it’s amazing to see the publicly traded internet market bloom anew. Demand Media is now public, soon to be followed by S-1 filers: Pandora and LinkedIn. We can safely speculate that Facebook and Groupon will be public in the next 12-18 months, possibly followed by Zynga, Yandex, Renren, and HomeAway? Need I go on? Chegg?
When they’re needed again, how many Internet analysts are still left on Wall Street? Mary Meeker is at Kleiner Perkins, and Henry Blodget runs Business Insider. Even if there are good sell-side Internet analysts left, they’ll surely have to juggle some media and telecom names off their current lists. No matter how you slice it, the sell side needs to adjust coverage and staff up in this area, and the buy side needs to remember how to focus on and trade the Internet as a sector on its own. The Internet sector will no longer be trading just GOOG.
I imagine we’ll see specialized hedge funds focused on Internet stocks, as well as existing hedge and mutual funds start internet-focused funds as they did around 1999. I even suspect many consumer internet venture funds and angels will begin to allocate capital to public names. This may be easier for angels to do then VCs, given LP expectations. With that said, given that internet VCs and angels have more expertise on these stocks than existing public market funds, it’s possible they’ll start investing here.
After all, some VC funds are already buying shares in the secondary markets of these pre-public names, which is already closer in flavor and style to public market investing than private investing.
Beyond the trading aspects, this is a windfall for entrepreneurs from an information perspective. Four times a year, we get great quarterly filings detailing challenges, margins, and operational changes made by the leading companies in our industry. Class is in session every earnings period. (As a side note, I find it hard to get filings into instapaper. I’d love an app that downloads filings automatically onto my iPad to read on the train.)