Morgan Stanley Slip Up? Here’s Why Analysis Should Be Automated

Last week Morgan Stanley published an equity research note on Snap, the company it helped take public, putting a $28 price target on the stock, only to correct it a few hours later. But surprisingly, the correction, which included some changes in important metrics such as EBITDA and WACC, did not change the target price and the recommendation that followed: Buy a SNAP stock.

The story was picked and broadly covered by the New York desk of Business Insider, describing in detail what might have happened. After admitting the calculation error, Morgan Stanley cut Snap’s 2025 adjusted EBITDA from $6.57 billion to $4.92 billion, and the free cash flow from $4.05 billion to $2.42 billion. That’s a drop of $1.7 billion in EBITDA and $1.6 billion in free cash flow. As the classic model of valuing a company demands using discounted cash flow, growth, and profit in estimating a company’s valuation, you would expect Morgan Stanley to change Snap’s stock price target. But it remained the same.

After maintaining its recommendation to buy Snap’s stock last Monday, shares rose 4% in New York. Morgan Stanley’s ‘buy’ rating was widely covered and was also mentioned as one of the reasons, together with four other analysts, for that day’s hiccup in stock price. Morgan Stanley was not just another analyst – it was Snap’s lead underwriter.

 

Source: Yahoo Finance

 

How did Morgan Stanley maintain the same price target of $28 despite the fact that it was higher in 23% than the previous business day’s price? Business Insider explains that it did so by lowering Snap’s equity risk premium and the weighted average cost of capital (WACC), a measure that takes into account the cost of issuing equity and borrowing, a figure that is considered as highly subjective in a valuation model.

Was that a coincidence? Did Morgan Stanley find an inaccuracy in either EBITDA and WACC as well, that allowed to maintain the same price target?  It may look as if they were backing into the numbers, some experts are convinced, but it is actually not the real issue. The thing is that the main model of business research and equity research is broken. And yet, every brand new technology company that goes public is still dependent on old-fashioned conglomerates of investment, underwriting and research.

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A New Research Is Needed

First and foremost the current research for public tech market is skewed. It is ruled by investment banks that are market makers, rooted deep in Wall Street (and the Silicon Valley). For many research companies, research is just a platform, a product that facilitates the upsell of a panoply of other services, such as consulting, conference and workshop management, and publication rights. And research is expensive, offered by banks or giant research firms for somewhere between $30K on “access for a research platform” up to $10M “to provide a manager access to across the research company’s workforce.”

One of the reasons research is so expensive today is that it employs researchers who do their job using century-old, outdated methods and mindsets. And, yes, people sometimes can get things wrong and – worse – sometimes they play with the numbers. We don’t claim that is the case in Snap’s March 27th metrics correction, we have no idea what happened there, but there are enough other cases to prove this point.

It must not be that way. As AI and machine learning technology evolve, developing greater capabilities and replacing human labor in manufacturing, advertising, e-commerce, and even healthcare, these new technologies come to play a more prominent role in financial services. As algorithms help bankers hedge risks by better profiling loans or mortgage consumers, and as bots contribute to providing faster, more personal service, technology can assist in making equity research better.

That’s what we’re doing here at Zirra. We provide insights on private companies, which are synthesized from metrics produced by our proprietary AI and machine learning algorithms, as well as insights garnered from our network of experts.

Companies’ valuation, for instance, is calculated by a myriad of algorithms that automate the traditional valuation method. The process includes both Intrinsic and Relative valuation algorithms. The Intrinsic data includes revenue and expense estimations, traffic trajectories, advertising campaigns measurements, investment history, and velocity, based on aggregated sources. In the Relative analysis, data is compared and benchmarked with a database of thousands of companies with correlation to stage, space, size and trajectory. In total, we use more than 85 different public data sources to feed our system.

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This also produces a preliminary set of company ratings for other aspects of the company such as the product, the momentum behind the company and the founding team. For example, the algorithm concluded that teams of up to 3 co-founders, each specializing in his/her field of business, technology or marketing leads to growth, whereas teams of 4 or more co-founders carry a higher degree of risk. The machine learning algorithms track the growth of companies, arrive at conclusions independently and dynamically adapt for future analysis.

The proprietary big data technology allows us to scale and evaluate startups metrics within seconds and our network of experts allows us to create qualitative and valuable insights that no other directory can create. It’s faster; it’s tailor made to any startup or private company. And it’s much cheaper.

Investment banks are also starting to adopt machine learning solutions for various purposes. JPMorgan launched a predictive recommendation engine to identify those clients which should issue or sell equity. Also, Goldman Sachs’ execs said they were willing to develop an automated IPO process and other investment banking tasks.

Technology-based research is also more transparent and less prone to tricks as traditional research is. Oh, and Snap’s valuation by Zirra is $26 billion, as it has been for months prior to the company going public. This is also its current valuation today at the stock exchange. Try it here, our data base is free.

 

5 Startups That Snapchat Should Buy

Snap has worked its way wisely through small and medium acquisitions. In fact, the company had its largest growth recently in 2015, thanks to the acquisition of Looksery, the AR company that’s behind Snap’s animated lenses. Now, armed with at least $3.4 billion dollars that they raised during their IPO a week ago, Snap can indulge itself and buy more and larger companies. To benchmark that assertion, consider that Looksery was Snap’s biggest M&A so far, costing it $150.6 million.

 

Snap’s acquisitions. Source: Crunchbase

Musical.ly

The teen-focused lip-syncing app Musical.ly seems like a natural acquisition target for Snap. It is one of the fastest growing social networks apps which engages users with the phone’s camera, just what Snap is looking for. The Shanghai-based company boasted some 100 million users last fall and is growing rapidly, particularly since last May when there were not more than 60 million users.

Musical.ly is what Vine wanted to be but failed to achieve. It allows users to share videos of themselves lip-syncing to 15 seconds of a famous song or a familiar scene from a movie. Unlike Vine, the app plays the song for you and makes sure you can sing in your tempo and style. Musical.ly allows users the freedom to move and dance in a cool way and matches it with famous songs, making for some very viral video clips, turning a few of the users into online superstars.

The Chinese company behind it launched a few more apps, such as video streaming app Live.ly, which has become more popular than Twitter’s Periscope but still competes with Facebook Live. The have also released Ping Pong, a video messaging app, and Squad, a group video chat app that competes with Houseparty.

Nevertheless, If Snap chooses to buy Musical.ly, it will need pay not only for 100 million users but also to cover the total investment in the company that sums up to about $120 million. Undoubtedly, if executed Musical.ly would be Snap’s biggest acquisition so far.

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Blippar

UK-based Blippar has turned out to be one of the largest and most promising AR tech and content companies around the globe, raising almost $100 million and serving dozens of brands, publishers, and agencies. In addition to augmented reality and computer vision technology, Blippar’s strategy was commercial from the beginning, offering a platform that allows its customers to create AR content themselves. The company has counted Coca-Cola, Pepsi, McDonald’s, and Walt Disney as clients and, in that manner, Blippar can bring assets such as advertisers, technology, and users while being in line with Snap’s camera company strategy. [Read here for the full Company Analysis report on Blippar].

The company has seen better days regarding valuation, which could entice Snap to offer a deal good for both sides. In 2015, the company was rumored to have been valued at $1.5 billion following a takeover by US-based mobile chip maker Qualcomm. Zirra, a company that analyzes startups using data from 85 public sources, estimates Blippar’s valuation at no more than $700 million. According to a report published by Bippars’ accountants, the company is in need for another financing round, after raising about $100 million from two rounds, the last one a year ago.

Blippar is unique in its computer vision and deep learning technology that allows its app to recognize objects immediately and efficiently. The company had created the “Wikipedia” of the visual world, a byproduct of its technology that allows getting recommendations, definitions and more features about each object scanned.

Facetune

Jerusalem-based Lightricks, the company behind Facetune, is another smaller and cheaper candidate for being snapped up by Snap.  The Facetune app makes it easier to take selfies and then make them look awesome. The app enables users to perform high-quality edits to their photographs without the need of desktop software. The company currently offers three iOS apps: Facetune (also available on Android), Facetune 2.0, and Enlight. The first two enable users to quickly adjust their portraits, while the latter is aimed to editing any kind of photograph. Recently, Lightricks added automatic 3D meshing capabilities, making it the closest thing to having a professional photo retoucher in your pocket.  Zirra values the company at about $60-$70 million. [Read here for Zirra full Company Analysis Report on Lightricks]

Fitfully

Snap’s long term camera strategy has the potential to accelerate AR commercial applications, such as measuring physical items and transforming them into virtual objects inside the app. An application that scans the user’s foot and then recommends several shoe models would then make sense down the road.

Fitfully launched an app that takes a 3D scan of the user’s foot and produces an accurate model which is then used by the fitting engine they have developed. This fitting engine places and aligns the user’s 3D virtual foot “inside” a shoe to ensure its fit and accuracy, helping them buy shoes online with confidence. Users can share their 3D foot with others, which allows people to accurately buy shoes for friends and family.

In addition, online stores can also integrate with Fitfully’s mobile scanner and technology which offers a dashboard that can track inventory and generate shoe or user specific data. Fitfully’s potential market is huge: 35% of total online purchases of shoes are returned to the store, 90% of those because of poor fit, costing online stores an average of $4.90 per return for restocking. [Read here for the full Company Analysis Report on Fitfully]

Pinterest

Pinterest is, first and foremost, the biggest database of curated photos, but now it would also like to brand itself as the visual search engine for objects in the real world, a very similar quest to that of the UK-based Blippar. This can place Pinterest in an exciting position as a candidate for acquisition by a Snap that wants to be a “camera company.” Think of a Snap user taking a photo of an armchair, which Pinterest then identifies using Lens, a company acquired recently by them.  Cimagine, another acquisition of Snap, could then embed the virtual armchair in the room the user would like to preview it in before purchasing.  Pinterest, which already has e-commerce capabilities, is now pushing itself into search advertising, making this an interesting pairing.

Pinterest is considered as one of the dozen tech unicorns most likely waiting in the pipeline to go public after Snap. Now valued as low as $4.3 billion by Zirra, after being previously valued at about $11 billion, Snap may find the company more attractive to take over, along with their $300 million in revenue.

Post-IPO Optimism

After the hype tied with the first days of the IPO, the stock went down from $27 to about $21 today, back to the natural valuation of the company: around $24 billion. Yet, Oren Bar-On, senior partner at accounting firm EY thinks that Snap’s IPO is a good sign to the market. “The public likes to hold stocks of well-known brands and is willing to take risks after years of ‘drought’ in the IPO market. These are great expectations for additional yield over the market yield. Within two years we’ll have to see if Snap doubles its revenue on a year-on-year basis. 2017 will keep challenging growth startups with a blurry business model or without the elite technology that promotes growing platform such as VR, autonomous cars, AI, and bot. ”

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