This Law should be used in conjunction with Law #5 (Emphasize Meaningless Metrics) and Law #6 (Obscure Data), but is important as a standalone Law given the massive tool the Sell Side can be for your Hype Campaign.
The Sell Side needs context. First, they are very insecure people and more akin to an aspiring groupie who might not have found their group yet than an objective researcher of facts. You need to court them.
Always tell them “great question” or “really appreciate the question, I’m glad you brought that up” when they ask a question on a conference call, especially if it’s the most bone-headed question you could think of asking. This will make them think you like them, and they will immediately, subconsciously, begin taking in only the good things you are saying and ignoring the bad (or ignoring what you’ve omitted…as you know from Law #8, you never show weakness on a conference call). Try to speak to each question at length, even if you stop addressing the original question (see Law #15: Give Non-answer Answers, e.g. ramble). This not only makes the analyst feel important again, but also gives you another chance to wax philosophical on the disruptive nature of your business and rapidly growing massive TAM.
Understand the sell-side spend most of their days on the phone, talking to their clients, trying to pitch their top long ideas. They do not have time for a complicated story, and certainly don’t have time to think how to distill a complex story to simpler story. Make their lives easy for them.
This is most easily accomplished by feeding them data points that sound impressive and achievable at first glance, and can be packaged as digestible sound bites for the sell side to put in their reports and parrot to their clients. Sometimes the spoon-feeding and parroting can be for simpler items, such as Go-Pro calling their cameras “happiness inducing, universe altering, life capture devices”—no one history has used such a term for a camera. To give you a sense of the level of mindless and absolute parroting by the sell-side word-for-word, many sell side reports will also refer to Go-Pro’s camera as life-capture devices (see Law #22: Bedeck the Banal).
An even better example of this recently is IACI’s Greg Blatt, who oversees The Match Group dating websites Match.com, OKcupid, and Tinder. Tinder is IACI’s “hot asset” and the “story” behind the stock, even though it is not making any revenue yet and Greg refuses to even give users counts (which would be the standard fluff metric to at least provide: MAUs and DAUs). Instead, Greg leaks that Tinder produces a “billion swipes” a day (with Tinder, you either swipe your phone left or right to indicate whether you like a dating profile.) It is hard to argue with a billion, even though it does not really even say anything about how many people are using it, how that might help it make revenue, or even how many more swipes that was compared to a few months ago.
Blatt then expertly framed Tinder’s revenue/EBITDA generation capability by laying out the following statement on an earnings call (Q2 2014 call):
"If you took Tinder's current user base -- so June, 2014. And, you monetized its North American and European users at the rate that we monetize on OkCupid, and we monetized Tinder's users in the rest of the world at 25% that rate, you would be looking at about $75 million of additional EBITDA this year."
The brilliance of this statement are several fold. First, he starts with a data point we do not have and he will not provide (Tinder’s current user base), making it impossible for a discerning mind to even start proving or disproving what he is saying (Law #7 Give Un-falsifiable Forecast, increase dependence of your investment thesis on far-off forecasts). Second, he sets forth a simple (and even conservative) sounding framework for monetization by comparing Tinder to OKCupid, another dating website they have been attempting to monetize the last 4 years. Finally, he comes up with a large EBITDA number that, if one has already drank his Kool-aid, they may misconstrue as guidance rather than just a hypothetical. This methodology also plays into investors’ natural tendency towards a Saliency Bias, which causes them to be overly influenced by (false) analogy to memorable success (similar to Law #21: Compare Apples to Oranges).
It does not matter that monetizing Tinder at the same rate as OKCupid will be a massive, unachievable Herculean feat. After four years of working desperately to monetize OKCupid IACI is only getting it to about 20% of the level of Match.com, and OKCupid is closer to Match than Tinder is to OKCupid. It also does not matter how he is thinking about defining EBITDA, as in the same breath just one sentence later in the call Greg claims Tinder is massively hurting Match Group’s profitability as a way to explain the group missing estimates. No nevermind this, as he assures us Tinder will generate 50% EBITDA margins, well above Match Group, and thus will be accretive soon enough.
The only thing that matters in this case is that he has spoon fed the Sell Side an easy way to pitch the stock: “1 billion swipes, think about that” and “They are actually being conservative and assuming Tinder doesn’t even monetize as well as OKCupid internationally.” Furthermore, because it was a hypothetical, he can get people excited and shift focus well into the future about something intangible while simultaneously slowly lowering near term expectations.
This has already happened with IACI, as Tinder has delayed their original monetization plans by at least six months (and counting) while adding unexpected “scaling costs”. No matter, the eventual vision (whenever it gets there, whether it’s 2016 or 2020) is firmly part of the Match Group conseneus mythology and consensus estimates.
You may think this is overstating things: that people whose lives should depend on being skeptical of abstract goals would not blindly begin forecasting off fluffy hypotheticals, but that is not the case. It is important to reiterate the psychological and professional pressure these people are under…they wwant to find the story with least resistance. They know that other sell side analysts will latch onto the same comments and are terrified of straying from the herd. Even if the herd is wrong, they will be wrong collectively, they can blame management, and the chance or getting fired will decrease. Similar to the notion that you “don’t get fired for buying IBM,” do not underestimate the notions of self-preservation and misery loving company.
It’s usually safer to shoot first and ask questions later when a CEO lays out a grand vision, as the stock could rip past your 18-month price target in a few hours. Whether you are the Bank of America Merrill Lynch analyst who literally plugged in the $75 million EBITDA Blatt referenced into his model for 2015 with no explanation, or the Oppenheimer analyst who took his OKCupid metrics and applied them to Tinder to find a way to raise his estimates and price target, it’s better to latch onto management commentary and be wrong then to fall behind and miss the “big move.” Understand the psychology of the Sell Side, and exploit it mercilessly to propel your Hype Campaign.
An additional and obvious point to make is that the sell-side mostly exists as the chief propagandists for the parent company investment bank to sell equity and debt securities and milk the fees from companies that are reliant on the generosity of strangers to fund their cash burn. The Law of Hype Corollary to this law is Law #19: Befriend the Bankers: Maximize the number of investment banks covering your stock.