Industry analysts provide vital insights to those valuing tech businesses, conducting due diligence and facilitating IPOs. The impact of a good valuation is exemplified by recent SaaS IPOs like nCino, a $145m fintech valued today at $8bn on the NASDAQ. Many SaaS firms benefit from both high growth markets and the post-COVID world in which business models need to rapidly migrate online.
Analysts’ impact varies for pre-IPO firms and public ones, and analyst relations approaches need to be modulated accordingly. However, analyst research is key to informing market expectations of risk.
Fund managers are ‘risk averse’, that is they will seek to avoid risk while maximising the return of their investment. For a public firm, risk (or the volatility of return on an investment) is a measurable statistic, which is calculated as the standard deviation of the return generated by the security.
At Lighthouse Investor Relations, we found that a high-risk statistic for public firms might be a sign of regular mispricing of your shares by the market. This could either be due to information mispricing or liquidity mispricing.
Quantitative fund managers will take the risk statistic as a given figure and discount that risk factor into their stock selection, which could mean your stock gets discounted out of their portfolio! The most effective approach is innovative because, rather than take the risk calculation as a given, it establishes why the company received that statistic. Sadly, few investor relations teams can leverage analyst insight to calculate if this statistic is unfavourable to the market or competitors and suggest a methodical approach to controlling that risk.
Shareholder value is a function of business performance and market risk. Often it’s easier to change perceptions of the market than of the company. As a result, reducing your stock’s risk characteristics your investors will repay you with a higher rating on your stock.
A key resource for that is the Analyst Value Survey, which shows which firms influence investors the most. Allocating extra resource to shifting their perceptions can have huge impacts on the firm’s valuation. Ignoring that, as Apple found (Did Apple & IBM know which analysts could trash share prices? Do you?), can have a huge impact.