Tech's Cheerleader Won't Say Die

Analyst Mary Meeker still rates Yahoo! and others a "buy"

By Steve Hamm in New York
Business Week

April 30, 2001

The news came down at 5 p.m. on Apr. 11, and it was ugly. Yahoo! Inc. (YHOO ), one of the bluebloods of the Web, reported that its revenues for the first quarter had dropped a sickening 22%, and it had suffered a loss due to the collapse of dot-com advertising. The company would have to fire 420 people, its first layoff ever. Yahoo's stock closed that day at a measly $15 a share--down 94% from its all-time peak of $237. Of the 33 analysts who cover the stock, 24 rated it a sell or hold.

Not Mary Meeker. Morgan Stanley Dean Witter's Net analyst is stubbornly sticking with a buy rating. Her rationale: With the price so low, this is no time to sell. "If we believe in the business, the last thing we're going to do is downgrade it at the bottom," she says.

At least she's consistent. Meeker has been Wall Street's No. 1 cheerleader for the Internet. In a series of reports from 1995 to 1997, she built the case for a tech revolution that would crush the pillars of the media and retailing Establishments, creating a new world order dominated by dot-coms. She helped profitless startups go public, counseled CEOs such as Inc.'s (AMZN ) Jeff Bezos on strategy, and wrote glowing recommendations of her picks. And as stocks blasted into the stratosphere, so did Meeker. At the peak of her influence, in 1999, she had requests for 400 speaking engagements. The media crowned her Queen of the Net.

"CRAZY." Now, even though Meeker's reputation has cratered along with the stock prices of her beloved dot-coms, she refuses to change her tune. While former Net drumbeaters such as Lehman Brothers Inc.'s (LEH ) Holly Becker and Merrill Lynch & Co.'s (MER ) Henry Blodget have downgraded all of their pet stocks, Meeker has buy ratings not only on Yahoo but on a handful of other Internet walking wounded--including (PCLN ). "If I didn't think we're being crazy like foxes, I'd be in a bad place right now," she says.

Meeker figures she has been here before. Five years ago, in 1996, it was America Online Inc. (AOL ) that seemed to be on the ropes. The company's servers were crashing like kamikaze pilots, and analysts questioned its accounting practices. Most analysts abandoned AOL. Meeker recommended the stock--even after AOL revealed that it would write off $385 million for deferred marketing costs. "It was friggin' lonely," she recalls. But the crowd was wrong. AOL Time Warner Inc. has emerged a titan of American industry. If an investor took Meeker's advice on that day and bought 100 (split adjusted) AOL shares, that $160 investment would now be worth $4,300.

Meeker is betting that something like that could happen again. And she is working hard to prove it, doing everything from visiting institutional investors to working with industry people to fashion a promotional effort to highlight the positive aspects of the Net. "I feel a responsibility to this thing that I've played a role in creating," she says. "It's not in my DNA to punt." Last month, after Yahoo warned that its earnings might disappoint, Meeker stayed up all night writing a defense of the company based on its 30% growth in users.

Since January, with Meeker leading the charge, Morgan Stanley's team of a dozen tech analysts has put out a series of five reports sizing up the Net's prospects. Bottom line: Internet users worldwide should increase a healthy 25% per year for the next five years. Meeker's top picks are AOL Time Warner and Microsoft Corp. (MSFT ), but she urges investors to bet on a "basket" of stocks that includes online auction site eBay (EBAY ),, and Yahoo. They have captured the most eyeballs on the Web, and they have built brands as valuable as Pepsi and Kleenex, she argues. Ultimately, she says, dot-coms should be able to cash in on their vast audiences.

STIFF UPPER LIP. Meeker has been wrong before, though. Even when it became clear in 1999 that Net companies were frightfully overvalued, Meeker kept buys on most of the companies she covers. Priceline, for instance, topped out at 160 in April, 1999, and is now selling at 3. Nine of the 21 Net companies she has recommended are now trading (or were sold) below their IPO prices. While tech investors lost more than $2.5 trillion on paper, insiders say Meeker collected millions in bonuses. Her major error was not seeing that the tech correction she had predicted would wound the Web's biggies along with me-too dot-coms.

Critics say Meeker is emblematic of what's wrong with Wall Street. Morgan Stanley, like most major researchers, also handles public offerings for companies. "These analysts are hustling for underwriting fees, and yet they're supposed to be making objective calls for investors," says Jay Ritter, a finance professor at the University of Florida. "Meeker and others made bullish calls even when stock prices were unjustifiable. It goes down in history as an incredible embarrassment to the investment-banking industry." Meeker denies pandering to clients.

Will she be able to salvage her reputation? It seems unlikely that she will resume her reign as queen of anything in the near future. "You can be in the penalty box for a very long time," says Michael Kwatinetz, a former tech analyst at Credit Suisse First Boston who is now a venture capitalist.

Meeker, 41, is clearly anguished by her travails. One New York columnist even called her "demented." During interviews for this profile, she frequently launched into long, impassioned defenses of her stance on the Internet. Once, after a can of Coke fizzed over when she opened it, she joked edgily: "Even my soda's nervous." Still, she keeps a stiff upper lip. "She's not emotional. She doesn't cry," says her older brother, Dick Meeker.

She has invested a tremendous amount of energy in turning the Net into a very big thing. When Meeker landed in New York as a stock analyst in 1986, she fretted that she had missed out on the PC industry's go-go years. So she found her own revolution. In 1994, Netscape Communications Corp. turned the computing world upside-down with its Web browser. Overnight, Meeker became the Net's biggest advocate. "She said from the very beginning that the Web would be a mass medium and that people would pay for it," says Netscape co-founder Marc Andreessen.

Meeker put in 80-to-100-hour workweeks--a relentless schedule that required three personal assistants. All that hustling paid off. In 1996, Morgan's West Coast investment-banking team, lead by the legendary Frank Quattrone, quit as a group. Meeker took Quattrone's place as the firm's star player, thanks to her tireless networking with industry luminaries and her series of reports that sized up Net retailing and advertising businesses. "Mary's very opportunistic," says George Kelly, the firm's networking analyst. "She became the face of Morgan Stanley."

That's less true now. Meeker has been keeping her head down as she churns out her new Net reports. Reassured that growth is still strong, she thinks the Net is still in the early stages of adoption. She believes the ultimate e-commerce winners will be those that forge relationships with consumers yet leave inventory ownership to others.

Meeker is in a hurry to get this period behind her. But some people aren't ready to let Net analysts off the hook. "They haven't been properly punished," says a Wall Street headhunter. With the way the Nasdaq has been behaving, more punishment may be on the way.

How Meeker's Calls Rate

Her stock-picking has been mixed. Among the 21 Net stocks she has
recommended, nine are trading below their IPO prices--or were acquired
at less than their IPO price. Here's a sampling of her picks:


AOL TIME WARNER $.09 $43 Strong buy No With AOL's purchase of Time Warner, Meeker's long-held faith in the No. 1 consumer online service paid off.

AMAZON.COM 1.50 14 Outperform No Other analysts believe Amazon is headed for a cash crunch, but Meeker thinks the cyberstore can persevere.

ASK JEEVES 14 1 Neutral Yes Meeker downgraded the search engine, but only after it warned of disappointing earnings in December.

EBAY 3 40.75 Outperform No Meeker scrambled to cover the online auction leader on the day it went public after Morgan missed handling its 1998 IPO.

PRICELINE.COM 16 3.5 Outperform Yes The name-your-price travel site botched its expansion. Meeker concedes she mis- judged the size of the market.

* Adjusted for splits

Data: Thomson Financial Securities, Bloomberg Financial Markets, BusinessWeek

Resume: Mary G. Meeker

Mary G. Meeker

Born September, 1959, Portland, Ind.

Where She Got Her Type-A Personality: She credits her father. "My dad was intense and competitive, and he [would] drive you crazy," she says. He was a golf nut who built his own fairway and green in the family's backyard -- and pressured Mary to become a golf prodigy. She became captain of the golf team at Jay County High School, practicing at 5:30 a.m.

Education: A BA in psychology from DePauw University in 1981, an MBA in finance from Cornell University in 1986

Career Highlights: Started in 1982 as a stockbroker for Merrill Lynch in Chicago. After grad school in 1986, became a research analyst at Solomon Brothers. Switched to SG Cowen from 1990 to 1991. Moved to Morgan Stanley in 1991, where she covered PCs and then the Net. Now a managing director.

How She Got Internet Fever: Read a newspaper story in late 1994 about Netscape Communications. She believed the Net would change every industry, so she became the chief cheerleader for upstarts such as Yahoo!, Excite, and

Why She Loves Upstarts: She was a fan of Indiana high school basketball. At the time, there were no divisions, so little schools played big schools, and any one of them could become the state champ. "It was like Silicon Valley," she says. "The little guys would go up against the big guys -- and sometimes they'd win."

What Drives Her Today: "I want to make up for the year 2000," she says. "It was a bad year [for me] as a stock picker, and a bad year as an analyst."

Family: Single. Claims she has no time for a social life. Returns to Indiana frequently to visit her elderly parents, Gordon, 90, and Mary, 86. Fishes and skis with her brother, Dick, who is 21 years older, and his family, in Aspen, Colo.

Q&A with Mary Meeker: "We Had One Heck of a Feast"

Despite the famine that has followed, the Internet analyst maintains her belief "in the power of technology and...entrepreneurs"

Mary Meeker is Morgan Stanley's star Internet analyst and has long predicted that a Net-based revolution will shake the pillars of the business Establishment. Now the dot-com world seems to be collapsing around her. Yet she still believes the Internet is a very big thing -- and big companies will be born from it. She recently sat down with BusinessWeek Associate Editor Steve Hamm. Here are edited excerpts of their conversation:

Q: Have the decline in tech-stock valuations and the slowdown in demand for tech gear made you reevaluate your expectations for the Net?
A: No. We've just lived through the first phase. The underlying demand for Internet-related stuff is in many respects higher than anyone expected back in 1995.

User growth in the U.S. is somewhere between 15% and 20%. The market opportunities outside the U.S. are where it's at. I think we're going through a classic transition from one computing platform to another.

Q: What are the indicators and the potential problems that you worry about most?
A: No. 1 is that slowing becomes self-fulfilling. I'm worried about whether Alan Greenspan cut interest rates quickly enough. He waited that extra month. When we look back on it, we'll see whether the maestro made one mistake [which then] led to a cascade. People read that things are slowing down, and they slow down their purchases.

No. 2: We made a call early on that 70% of the dot-coms that went public would trade below their issue price. That has come true. And that's bound to change the economic outlook for a lot of companies. Still, I tend to be an optimist. I've been rewarded for being an optimist over time.... I believe in the power of technology and in the power of entrepreneurs.

Q: How does what's happening now compare to the tech bust of 1984?
A: One thing that was different is that very few people were paying attention to the tech sector [then]. Steve Jobs and Apple (AAPL ) didn't happen until after that. The personal computer really hadn't taken off.

The...units of PCs being sold were in the single-digit millions. There also was not a capital-markets frenzy. There were very few IPOs.... It took a long time to get it to critical mass. Now, it's much bigger. It's much broader.

The lessons...are, No. 1, excess happens. There were way too many companies that couldn't differentiate themselves. The other thing is it sorted itself out -- after a year or two.

Q: You say you think the best is yet to come. And then you say look two years out. Will it take a couple of years to sort through the current excesses and imbalances?
A: Feast is usually followed by famine, and we have had one heck of a feast. The duration of the famine is the question, and others are better qualified to make those calls. I have my armchair opinions, [such as] Greenspan will continue to cut rates. But if the currents are so powerful in the economy on the downside, there's nothing you can do to change it.

Q: What do you see in terms of new companies being formed and innovation?
A: It's really interesting. In the second half of last year there were more companies privately funded than we've ever seen. The majority of the companies funded over the last three years will not work. The ones that will work will probably work bigger.

There's scar tissue in the market. There were too many venture capitalists who didn't know how to be venture capitalists.

A lot of people didn't appreciate how hard it is to be an entrepreneur -- to be Michael Dell or Scott McNealy. Most people aren't cut out for that. And the number of truly big ideas is low.... The startup world is not for kids. It's dangerous. It's scary.... People were asked to be Michelango and didn't know how to hold a paint brush.

Q: So there's still capital. There has been a weeding out. What do you think will be the next wave of innovation?
A: There's a lot of interesting stuff on the infrastructure side. There will be companies that find ways to keep making the Internet faster. There's interesting stuff on the optical side. The semiconductor business is going though resurgence. The B2B business is a big one.... There will be a lot of software that plays into that. I'm not the expert on wireless, but I think it will be far more dominated by the traditional companies than the new companies.

Q: Why did the dot-com crash happen, and why has it continued for so long?
A: The typical company was going public at what used to be the first round of venture financing. People forgot -- or didn't know -- that 5% of the companies create 80% of the wealth. Equity financings reached a crescendo in the last quarter of 1999 and the first quarter of 2000. We kept saying this is risky. These valuations are high. There could very well be a downside.

Q: So investors just bet on everything, and that's what created an unsustainable bubble.
A: Yeah. And we're testing new ground here. I think the market could get too euphoric again. The optics market got hot for a while. With some of these new technologies coming out in the [next few] months, on a sector-by-sector basis, we might have mini-bubbles or mini-buckets.

A question is: Have the capital markets fundamentally changed where individuals are more willing to take on risk, and what do we do about that? I have issues with that. The disturbing thing is that markets never fully correct until the last believer will never believe again. That was from Adam Smith, in his book The Money Game. It took 10 years for the go-go growth stocks to come back then.

Q: Are there any businesses or business models that you no longer believe in?
A: Priceline is an example. I don't know if I don't believe in it, but it's the best example of a company that was doing so many things right and then suddenly it stopped. I think that's the most extreme example. The challenge for me with that company is that the concept is compelling.

The first questions we ask are: Is it working, and how viable is it? And you look at the data and the numbers, the customer relationship. The revenue was telling you it was working. The [next] question is: How many people will use this? And one of our early concerns about the company was that maybe the market opportunity wasn't going to be big enough. With Priceline, we knew there were limits on its size, but we didn't anticipate how fast it would get to its natural penetration.

Q: You helped invent this new investing paradigm of companies going public before they were making money. You helped convince Wall Street and Main Street this was O.K.
A: We did [it with] Netscape [among others]. At that time the rule of thumb was three consecutive quarters of improving profitability, and you could consider going to a Wall Street shop and taking your company public. With Netscape, the company didn't have that. Before that deal went out, there was a pause. The world was pausing to see how it worked. And it did.

The whole theory is that there are companies that can benefit from economies of scale and network effects. Microsoft (MSFT ) and AOL (AOL ) have benefited from them. You figure out how big the market could be, how big the company's market share could be, and that can be a good way of valuing companies for the 5% of the companies that can capitalize on network effects.

Q: That makes sense, but was ChemDex going to be in that 5%?
A: Chemdex was the IPO that ushered in B2B. It was very, very early stage. For us, it was almost a bet on how much we believed in B2B in this time of the land grab. In the end, it didn't work.

Q: This new regulation [from the Securities & Exchange Commission on financial disclosure]. How does it change things for you?
A: Fundamentally I'm in agreement with it. If a company has information that will materially affect its financial results -- impact revenue or profits by 5% or more -- the company has an obligation to disclose that in a systematic and broad way. That's the way it should be.

If a company has something that's not really material to their business or they're thinking about it, or an analyst is going though scenario analysis with them -- what if? -- is that something that needs to be issued in a press release? I don't think so.

Q: You've been criticized a lot recently. Is it fair?
A: On one level, I was pretty vocal in saying I didn't want to be the Internet poster child because a lot of this stuff is crazy. And I'm proud of the fact that we did just 8% of the IPOs and we created 40% of the value. Am I proud of the fact that some of those companies are below issue? No. But you can't get rewarded without taking risk.

But I know what I've done as a tech analyst for the past 10 years, and the companies we've recommended have created more than $600 billion in shareholder wealth. That's pretty powerful.

I had lived through 1991. The PC industry really got clocked.... But out of that came some of the greatest investments in history: Microsoft and Dell.

I'm pretty visible. I don't want to downgrade a stock that I truly believe will be one of the great companies of the next 10 years and I think can create a tremendous amount of wealth because it's trading near-term at a valuation that's too high.... I'm talking about the leaders -- Yahoo!, Amazon, all of them.

I believe the wealth creation will be huge. I may be wrong. But the test for me will be where these stocks are trading a year from now. If all the lessons I've learned from the past don't apply, I'll be wrong, and that will be bad.

Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.