Tech stock research firm MoffettNathanson to be acquired by SVB Financial Group

MoffettNathanson Co-founder Michael Nathanson joins Yahoo Finance Live to discuss the tech equity research firm's acquisition deal with the SVB Financial Group and the sports betting market.

Video Transcript

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BRIAN SOZZI: Well-known stock-research outfit MoffettNathanson is selling itself to SVB Financial. MoffettNathanson was founded in 2013 by industry veterans Craig Moffett, Michael Nathanson, Pat O'Connell, John Towers, and Ethan Steinberg, and focused on media and telecom coverage. It has since branched down to tech coverage, among many other areas.

Joining us now is the firm's founder and senior research analyst Michael Nathanson. Michael, good to see you here. Congrats to you, Craig, and the team here. I've been following you guys for a while. Why now?

MICHAEL NATHANSON: Thanks. Why now is a great question. Why now is we wanted to get closer to innovation, and we've covered media and telecom for many years, and we obviously see the changes that's happened from disruption.

We added Lisa Ellis, who covers payments and fintech. But we decided as a firm, look, we need to get closer to younger companies. And we're a partnership. It was always hard to kind of fund that growth, and Silicon Valley Bank's a perfect fit for us, right? They have access to all these young companies with entrepreneurial energy, and it will get us closer to kind of where change is happening.

And there's no other way to do it, right? So we're a small partnership, and this is a perfect outcome for us to be able to expand and improve our research offerings and our knowledge of all the changes are happening in our space.

JULIE HYMAN: Michael, it's Julie here. It's been so interesting to see this development of small, independent firms like yours over the course of my career. I mean, it used to be just you talked to the big banks, and that was it. And then all of these specialized boutique firms sprang up. What has been the advantage of doing things that way that you hope to now retain even as you're going to be within a bigger organization?

MICHAEL NATHANSON: OK, that's a great question. We all started at Sanford Bernstein many years ago, and 2013, we decided to go off on our own. The idea was that analyst research was like a smorgasbord. There was 30 to 40 analysts in a company. Payment for research was through training commissions. And we decided to create a really targeted model on initially media and telecom and now TMT.

We moved to subscriptions, not trading, right? And the idea was we wanted to really become experts, partners with our clients in solving and answering questions.

The idea is that we want to basically accelerate that transition, right? We want to add more analysts in this white space of TMT and become, you know, even more product experts on change.

The old model is hard because you need to have, like, 40 to 50 analysts across every sector to compete, and that's just hard. And also retaining people-- you want basically kind of an esprit de corps built just focused on kind of, you know, three or four great subjects.

And that's what we've done at our firm, right? Everyone knows us for media, telecom, internet, and now Lisa Ellis with payments, and we think we can add more people kind of in the white space of our coverage to become even deeper experts on these sectors, right?

And that's-- but we all came from big banks. We decided that in order to kind of have a more energetic, targeted, rewarding experience, we became smaller and just focused in on a handful of sectors that we thought we had expertise in.

JULIE HYMAN: And so, Michael, talk me through what now this transition looks like, what that sort of [INAUDIBLE] with a little more resources behind it looks like and what people should expect from you over the next year or two years, five years.

MICHAEL NATHANSON: Well, thanks. Nothing is going to change on our business model, right? We have a subscription-based research model. We don't have a trading desk. We are partnering with SVB Leerink. They have a trading desk. But our focus is going to be on just adding more coverage, right?

So we look at, like-- we have three big tent poles I'd say. It's Craig Moffett on distribution businesses, Lisa Ellis in payments and fintech, and myself in media and internet. We're going to add more analysts. We already-- and we already have a team of analysts covering verticals. Even today we launched on sports gambling with Robert Fishman and James Caceres.

You're going to see us add more experts in software. We hired someone named Zane Chrane, who came from Bernstein. We're going to add more software, more internet capabilities.

So we're going to build out more expertise. We're also going to do a lot more in the way of small cap and emerging growth companies, right? I could see us doing an Allen & Company-like conference every year in Silicon Valley, where we bring our clients and our companies together and focus on the best 50 to 100 greatest small, you know, growth companies.

And so we're going to spend more time on small emerging growth. We're going to spend more time on building out expertise in tech because we don't cover. We could not have done that in the way we were today. You know, it's just really hard as a small company to really invest in that growth and build the capabilities we wanted to build in time. But partnering with Silicon Valley Bank and Leerink just opens up the door to so many different things we could not have done before.

BRIAN SOZZI: Michael, I invested so much time in covering the deal news for you guys here. I missed your launch on sports betting. What does the team like here and what don't they like?

MICHAEL NATHANSON: OK, so, yeah, it's funny. We put it out this morning at 7 o'clock or 7:15 ahead of the deal news. We'll reissue that report. We see the opportunity, the launch opportunity, the TAM opportunity in sports gambling.

We launched on DraftKings with a neutral, Robert Fishman did, and the thinking was that the cost to compete is so high. They were just nervous about kind of the return on invested capital right now in sports gambling.

It reminds us a bit like streaming right, Netflix? Netflix-- well, it's nothing like streaming in the sense that Netflix was early as an innovator. They were the first mover. They built up a ton of subscription revenue, and they were able to invest behind that.

You have in sports gambling kind of a open ground, right? It's just a race to the top. And with all these entrants trying to compete to grab users, it's just a very expensive game to play.

So we see the opportunity. We think it's really attractive. But right now, right here we just worry about there's too much competition, and there isn't, you know, an early-mover advantage here, even though DraftKings and FanDuel have a nice lead. In order to compete, it's going to be really expensive. So that's our view right now.

JULIE HYMAN: Michael, I think why we like talking to people like you and Craig is not only just the depth of your knowledge about this stuff but obviously you get excited about it, just like you're getting excited talking about DraftKings. As you look across your coverage universe, like, what's the thing that you are the most excited about, whether it's a kind of technology, media technology, or a specific company?

MICHAEL NATHANSON: OK, that's a great question. Thank you for asking that. You know, we are not permabulls or overly-- you know, we are researchers. And I'm excited to talk to you today, but, like, we always try to ground our work in data and fundamentally industrial views on where businesses are going.

We've been bullish for the past year and a half on digital advertising. I know you would say, well, Michael, isn't everyone? But our view is that the trends in digital advertising grow faster and last longer than consensus think, so we're really bullish on Facebook, Google, and Snap.

You'd say, well, isn't everyone? But the truth is Facebook's been a really weak stock this year, and Snap has been OK, and they've had IDFA challenges. So we're really bulled up about the long-term growth in digital advertising, above and beyond what the Street thinks.

And, yes, everyone owns FAANGs, but we are really excited that these stocks can keep working. And somebody said to me today like Apple circa 2016 where everyone thought I was going to start to fade, so that's-- that's kind of where we're pumped up.

We're not as pumped up in media just because of the cost to compete in streaming wars, right? So we have not-- we have one buy on Fox because they're not in streaming. They're just in live sports, live news.

But we're really tilted towards digital advertising. We think there's just continually better numbers than people think the next few years.

BRIAN SOZZI: Well, as a former researcher myself, it's been fun following your journey and looking forward to staying in touch, of course. MoffettNathanson founder and senior research analyst Michael Nathanson, congrats on the deal today.