Estimize, a More Honest Look at Earnings Estimates

Wall Street analysts are about to get some serious competition – you. After coming out of a beta with 250 individuals, Estimize is ready for primetime. The site is now open to the public, allowing anyone to sign up for free and begin participating in the social community. Do you have a solid prediction for Microsoft's MSFT FQ3 2012 revenue or EPS? Perhaps you think you know where Ford F or The Cooper Companies COO is headed in 2012. Or maybe you would like to see how other members of the Estimize community expect Verizon VZ to perform in the coming year. Whatever the case, Estimize is providing a venue for all of this and more. Earlier today, Benzinga spoke to Leigh Drogen, the co-founder and CEO of Estimize, to learn more about this promising service and the events that inspired its creation. “There's a triangular relationship on Wall Street between the banks, the buy-side, and the company,” Drogen explained. “The banks provide the company with investment banking services. The company pays the banks, obviously, to do all of their transactions. In return for good press from their analysts, the banks kind of…they give the company good press, and then the buy-side gets to access the company.” Drogen said at that at the end of the day, it's not really the sell-side analyst's job to provide research or good estimates. “Their job is really to provide access to the buy-side,” he said. “That's what they're there for; they're just shepherds between the company and the buy-side to connect them. In order to develop that relationship, they can't piss them off by going out and saying, ‘We believe that the Netflix NFLX margins are going to collapse,' because then the company would sit there and say, ‘Why are you writing research reports on us that negatively affect our stock? Why are we gonna give your clients access to us?'” This inspired Drogen to build a site that would “really open it up to the buy-side, independent analyst, corporate finance people – anybody, because they don't have those same shackles of having to play nice with the company.” “They can say anything they want,” Drogen boasted. “They can be as accurate or as verbose as they want about the company and it doesn't negatively affect them. In essence, not only do you get a more truthful or honest look at what a company is going to earn or do, but you get a more representative consensus estimate. Right now you're only getting that consensus from a specific group of analyst on Wall Street who have this very tight incentive structure. None of them wants to screw it up because their job isn't really to be right – it's just to be there.” Prior to co-founding Estimize, Drogen founded Surfview Capital, a New York-based investment management firm that utilizes a momentum- and trend-based strategy. Drogen was also one of the early members of the team at StockTwits, where he led the creation of the Chart.ly platform. Before that, he worked as an analyst at Geller Capital, a White Plains-based investment manager. Accuracy Counts “You get this more representative consensus, and then for traders and investors, it gives them a better idea of what the market is actually thinking, not just not what that small data set on Wall Street is thinking,” Drogen continued. While Estimize hopes to provide a clearer and more honest picture of stock market estimates, Drogen said that there will be times when the Estimize consensus is no more accurate than Wall Street. “I think there will definitely be stocks that we don't get a more accurate consensus for, stocks that Wall Street analysts don't have any reason to skew their estimates, such as Coca-Cola KO,” he said. “[Coca-Cola's] business model isn't changing very much. Analysts have a pretty good beat on what Coca-Cola is going to earn every quarter. We're not really interested in disrupting that. “What we're interested in disrupting is the fact that they failed to call the miss in Netflix margins and EPS because they didn't want to make waves. The Estimize community is way out in front of that already, even during the private beta period.” A Force Unlike Any Other As another example of how Wall Street has failed to deliver an accurate consensus, Drogen cited Salesforce.com CRM. “While they beat the Wall Street estimate, what really mattered was that all of the private beta testers on Estimize believed that the multiple was going to get crushed, and it did,” said Drogen. “That's valuable information there for traders, showing that the group of people here think the multiple is going to get crushed even if they beat the EPS estimates. We're going to be getting into that as well.” Right now, Estimize covers two different data points: EPS and revenue. But the site will soon add data points for margins and EBITDA. You will even be able to share your predictions for how many units the next iPad or iPhone will sell. Further, Drogen said that Estimize will be doing “something interesting” around multiples. “So if you think about the way a buy-side trader thinks, what we do is, we say, ‘The next quarter out, I believe the company will earn X and I believe the market will give it a Y multiple,'” said Drogen. “That's kind of how we get the price. Nobody has really done that yet, and taking the temperature of market participants as to what they believe the stock will trade at.” Flagging Bad Predictions When I asked about the dangers of slimy investors who may want to use Estimize to push a stock in their favor, Drogen assured us that the site has multiple flagging systems to prevent this from becoming a problem. “It will always be a human problem that you can put algorithmic tools against,” said Drogen. “But we're counted on as the supervisors of this community, and if that means that we have to manually go through a certain amount of stuff, then we will be doing that.” However, Drogen does not agree with the assumption that there will be investors who try to take advantage of Estimize. “A lot of people think that there are these nefarious people in social finance that can somehow sway the market in some way,” he said. “If you're talking about microcap stocks, yeah, but we're not dealing with any of those, just as StockTwits doesn't deal with those. It's a horrible, horrible mess of an ecosystem when you get down into those penny stocks. We're dealing only with stocks that trade liquidly above $300 million market cap. We don't believe that anybody putting their voice out on this is going to be able to actually move markets. We don't think that's gonna happen.” Moving Markets While slimy investors may not be successful in abusing Estimize, Drogen said that legitimate members could one day move the markets. “If there is a stock, such as iRobot IRBT, that the group – say, 40 or 50 people – [and the group] has proven themselves to be more accurate than Wall Street [over the course] of the next one, two, three quarters, I think that eventually as Estimize grows, you could get into a situation where we do move the market in that sense, because now the expectations for earnings has [changed],” he said. “You're looking at this old expectation set, which is Wall Street, and now you've got this new expectation set, which is Estimize, and they've proven to be more accurate, you could definitely see a stock like iRobot make significant moves if that Estimize consensus as a whole group really keeps inching up, up, up throughout a quarter.” Follow me @LouisBedigian