Morgan Stanley's Facebook analyst: sober man in world of hype

NEW YORK (Reuters) - Scott Devitt has long stood out for being cautious in a world of Internet bulls.

In the more than 12 years that he has covered Internet companies as a Wall Street analyst, Devitt has developed a measured approach to a sector that often succumbs to hype.

Devitt, who replaced star Internet analyst Mary Meeker at Morgan Stanley in 2010, was one of the few analysts to cut his price target for Google in January after the company's fourth-quarter earnings missed analyst expectations by more than $1 a share. In February Devitt downgraded Amazon to equal weight from overweight, while the majority of analysts had a buy or strong buy on the stock.

And Devitt once insisted that his then-employer skip underwriting a dot-com bubble era IPO because he was not convinced the company could compete with a larger rival.

But all those contrarian calls pale next to the one he made just days before Facebook priced its $16 billion initial public offering. That one has become the subject of industry debate, regulatory scrutiny and investor lawsuits.

Devitt was one of a number of analysts to lower his revenue and earnings expectations for the social media giant after the company informed analysts that it was dropping its quarterly and annual revenue guidance. Facebook also issued an amended prospectus cautioning that the shift of its users to mobile platforms could have a negative impact on revenue growth.

Such a move was highly unusual because it occurred just days before Facebook's highly anticipated IPO, whose lead underwriter was Morgan Stanley, Devitt's employer. The investment bank not only had control over the process, but over 38 percent of Facebook shares being sold

Devitt's and other analysts' revised revenue forecasts were shared via phone calls with institutional investors, but not with retail investors, before the stock began trading publicly.

That in turn raised questions over whether the playing field was skewed against Main Street investors from the start and sparked lawsuits

It is a limelight that Devitt is not used to and doesn't feel comfortable with, according to people who know him.

"On one hand we could say this is fantastic that the analyst had the guts on the eve of the biggest IPO in history to say something bearish," said Josh Brown, author of the blog The Reformed Broker. "On the other hand, the only ones who were on that call were a handful of institutional investors," said Brown, who does not know Devitt.

Devitt did not return calls or e-mails for comment.

Morgan Stanley said in a statement that it forwarded Facebook's revised prospectus to all of its retail and institutional clients and that its IPO procedures were in "compliance with all applicable regulations." The company did not respond to questions about why it did not tell all its clients, including small investors, about the forecast change.

"FISH OUT OF WATER"

When Devitt replaced Meeker, he had no desire to become as big a name as was Meeker - who was dubbed "Queen of the Internet" in the industry - according to two people who know Devitt well but asked to remain anonymous because their employers do not allow them to speak to the press.

"He's not loud or showy in any way," said one of the people who is close to Devitt.

While friends say Devitt is frugal, public property records show that last summer he and his wife, Katherine, purchased a 4,800-square-foot historic home set on 2.3 acres in Ho-Ho-Kus, New Jersey, for $1.575 million. Even so, Devitt, a 39-year-old father of three, takes the bus to Manhattan every day.

He often keeps the same cars for years, friends said, and currently drives a minivan. He once sold a Saturn that was so old that the friend who bought it joked it wouldn't make it beyond his own property, according to the second unnamed source, a former colleague.

"He's kind of a fish out of water in New York - family is very important to him," said the person, who is close to Devitt.

Devitt nearly left the analyst world in 2007 when he accepted the job of chief financial officer at online jewelry retailer Blue Nile Inc. But Devitt changed his mind because he did not want to relocate his family to Seattle, according to a news report published at the time.

His approach to analyzing companies might also strike some in the world of New York bank analysts as different, too. Devitt, sources said, often takes time to talk to investors about his recommendations and why he made them. He also solicits feedback from the people he works with, even junior level colleagues, according to people who know him.

Devitt has a history of being cautious. In 2007 and 2008, many analysts were bullish on e-commerce provider GSI Commerce as it went on an acquisition tear, but not Devitt, said Michael Rubin, founder and former CEO of GSI, which was bought by eBay for $2.4 billion in 2011.

"Others just liked us for the fact that we were doing acquisitions, but Scott wanted to see how things played out," said Rubin, founder and CEO of Kynetic LLC.

Rubin saw this as a challenge. "I paid more attention to what he had to say," he said. "He was very thoughtful about all of his research."

GOOD AND BAD CALLS

Devitt was born in Massachusetts and is an avid Red Sox fan, according to friends. But he mostly grew up in Jacksonville, Florida, where he played baseball in high school and then in college at then-Division II University of North Florida. He shares the school record for most runs - five - scored in a game, according to UNF's records.

After earning an M.B.A. at University of Georgia's Terry College of Business, Devitt worked as a financial analyst at Dell, according to his LinkedIn profile - which appears to have changed at least once since the Facebook IPO to add to his specialties "resistance of the institutional imperative."

As a teenager and later in college, Devitt helped with the family sporting goods business, The Hatman Inc, which sells vintage sports jerseys and hats, according to his LinkedIn page.

Devitt is a fan of Warren Buffett; he even has a license plate holder that reads "In Berkshire Hathaway we trust," according to one of the people close to him. His Amazon.com reading list include two items on Charles Munger, a value investor and Buffett partner whom Devitt's friends say he greatly admires.

Munger has been publicly bearish on Facebook.

"I don't invest in what I don't understand. And I don't want to understand Facebook," Munger told CNN in early May.

Devitt's cautiousness has worked against him. He has underweight ratings or equal-weight ratings on 15 of the 23 companies he follows, meaning that investors should either hold or sell those 15 stocks.

But for the past two years, the companies he has underweight have returned 19 percent, almost 8 percentage points more than the absolute return for all the companies he covers combined, according to Thomson Reuters StarMine data.

StarMine gives Devitt three out of five stars on his recommendations and two out of five stars on his earnings estimates, an average rating.

Some of his calls have been spot on, even if a bit early. In February 2011 he downgraded Netflix from overweight to equal-weight. Shares had been trading at $240.79 at the time. That July the stock hit a high of $298.73, up 19 percent. Devitt didn't sweat it, a person close to him said.

By the end of the year, Netflix was floundering after changing its pricing and its decision to split its streaming and DVD businesses. Shares now trade around $67.46.

Sometimes, though, Devitt can be slow to downgrade a company, according to a Reuters review of his reports. In March, online deals company Groupon downwardly revised revenue and earnings it had reported a month earlier and its stock dropped 17 percent. Devitt called the announcement "a mild hiccup in Groupon's compelling long-term story," and kept an equal-weighting on the company.

The stock is down 27 percent since April 1.

Devitt has also found himself at odds with investment banking interests at the companies he has worked for. When online retailer Buy.com was planning to go public for the second time in 2005, Devitt advised the firm he was working for, Legg Mason Capital Markets (now part of Stifel, Nicolaus & Company) against underwriting the deal, the former colleague said.

The firm did not heed Devitt's advice, but "it takes a lot of guts for an analyst to (try to) kill a deal," the former colleague said. Buy.com eventually withdrew its IPO plans.

In May, Devitt initiated coverage of Millennial Media with only an equal weight, even though Morgan Stanley was the lead underwriter of the deal. Similarly, when Devitt initiated coverage of Groupon, for which Morgan Stanley was the lead IPO underwriter, he gave it an equal weighting.

"A lot of analysts play the game because of their relationships with the investment bank, but Scott tells you what he thinks," Rubin said.

(Additional reporting by Olivia Oran; Editing by Jennifer Merritt and Steve Orlofsky)

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