Technology Analyst Overoptimism

It has been clear for many years that the big New Tech analysis houses exaggerate the future impact of (sales, penetration, benefits etc) of new technologies (the Gartner Hype Curve was invented for the sector after all). The reason is also fairly well known - no one buys research from people who tell it like it is most likely to be, because then few business cases would fly, few VCs would invest and then where would we be.

We routinely divide Mobile industry projections by 2, as we know most will be reduced to this level 2 years later.

What I had never really understood though is why Tech Analysts from the Investment Banks were the most overoptimisitc in the dotcom boom (Henry Blodgett and Mary Meeker are the most infamous). An explanation from McKinsey shows why:

McKinsey research shows that equity analysts have been overoptimistic for the past quarter century: on average, their earnings-growth estimates—ranging from 10 to 12 percent annually, compared with actual growth of 6 percent—were almost 100 percent too high. Only in years of strong growth, such as 2003 to 2006, when actual earnings caught up with earlier predictions, do these forecasts hit the mark.

The capital markets, by contrast, have been more realistic: except during the 1999–2001 market bubble, actual price-to-earnings ratios were 25 percent lower than those implied by the forecasts of analysts.

So there you have it - Tech Analysts over hype, Equity Analysts are Overoptimistic, so Tech Equity Analysts...well, the 2x2 above explains it all