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If you bought stock in software company MicroStrategy (MSTR) at the end of February for $150 a share, you might be asking yourself, "Why bother selling it now?" Although it gained 122%, to a high of $333 on Mar. 10, you surely have been watching in horror the past few weeks as it plummeted, closing May 9 at $21.50. For investors with lots of money and a small remaining stake, whether to hold or to sell is a fair question. But shareholders less sanguine should take note: The way the stock price is acting lately -- it fell 1.5 points, or 6.5%, on May 9 -- plenty of investors believe MicroStrategy's slide is not over.
But in a fall from grace as dramatic as this one, it almost seems incidental to mention that MicroStrategy's core business is selling "data-mining" software, which helps companies slice and dice customer information to stay abreast of new trends in their industries. The stock really soared on hopes for the company's Strategy.com division, which delivers personalized information about weather, stock prices, and other topics to mobile devices, such as cell phones and personaly digital assistants.
Hopes for a brilliant future were dashed when MicroStrategy revealed in March that it had run afoul of Securities & Exchange Commission accounting guidelines. The stock fell 62%, from $227 to $87 on Mar. 20, after the company said it would have to restate its financial results for 1998 and 1999 to comply with SEC rules on revenue recognition. The
company's mistake was booking revenue from multiyear sales contracts immediately, instead of spreading them out over the life of the contract.
"SIGNIFICANT UNKNOWNS."
Wall Street, it seems, doesn't really know how to assess the company's prospects anymore. While First Call Corp. tracked nine analysts who covered the stock at the end of last year, only two have earnings estimates now, says Chuck Hill, First Call's research director. "Clearly, the analysts are either having trouble figuring it out or have totally thrown in the towel on the company and dropped coverage."
The consensus estimate for the two firms maintaining coverage is for a loss of 94 cents in 2000 and $1.24 in 2001. Back in March, before the accounting problems came to light, analysts predicted profits of 25 cents per share in 2000 and 39 cents in 2001. "It's not like MicroStrategy had a hiccup and lost a year and now is back on track," Hill says.
Mark Murphy, an analyst with FAC/Equities, rates the company a "strong buy." But he readily admits, "there are some significant unknowns, and the thing the market really doesn't like more than anything else right now is an unknown." In an Apr. 27 research note, Merrill Lynch analyst Chris Shilakes referred to an "information vacuum." He added that he expects trading in the stock to remain volatile until Wall Street gets more comfortable with the company's future earnings potential. He has an "accumulate" rating and predicts the stock "will stage a slow rebound" to around $35 a share.
OVERREACTION?
MicroStrategy used to stand out as the rare Internet business with real profits. But the profits have evaporated without those future sales on the company's ledger. The company now has losses on its books for all of 1999. And on Apr. 26, it announced first-quarter results that came in far below analysts' already reduced expectations. Wall Street had been anticipating an operating loss of 14 cents a share for the first quarter,
but MicroStrategy lost 37 cents a share, according to First Call. The stock fell an additional $5, to $24 5/8 on Apr. 27.
The company -- as well as some analysts -- insists that investors have overreacted. All the future revenues booked for 1998 and 1999 eventually will materialize, Murphy says. "People are completely overlooking the fact that the long-term value of the business is unchanged by the change in accounting," he adds. But the stock price is 75% lower than it was after the first announcement on restated earnings. Since then, the company has restated earnings a second time, reflecting losses rather than profits for the past two years, and it has indicated the SEC isn't finished investigating the accounting situation. MicroStrategy declined to comment on these issues.
No one has been hit harder by the savage repercussions of recent weeks than MicroStrategy CEO Michael Saylor. The brash 35-year-old executive, who owns a 56% stake in the company, saw his personal net worth dive from nearly $10 billion to less than $4 billion in one day. Apparently, his troubles are far from over.
UNAPPEALING OPTIONS.
First, MicroStrategy was forced to cancel its plans for a secondary stock offering, which would have provided needed funds to power Strategy.com to the next level. Now, investors wonder whether MicroStrategy will still be able to spend millions on the Strategy.com venture, perhaps incurring greater losses. The company could be forced to scale back on its ambitious plans, limiting the potential of the widely touted wireless opportunity. Neither option is appealing.
To make matters worse, with operating expenses escalating, MicroStrategy ended last quarter with only $17.5 million in cash on its balance sheet -- $13 million less than the previous quarter. Concerns about how quickly it's running through its cash on hand have surfaced, even though the company says it's crucial to continue to market Strategy.com.
Meanwhile, numerous shareholder lawsuits and the SEC investigation continue to cast doubt on the company's ability to secure more financing. "It would be a real good sign if they could announce some kind of financing," says Murphy, who thinks the company could still do
a deal.
But the overall market currently likes few things worse than a technology stock with little cash and no profits for the foreseeable future. That leaves little hope for a near-term rebound in the shares. It's "kind of comical," notes Murphy, that investors were wildly bullish on MicroStrategy when it was trading above $200, but now that it's in
the $20-dollar range, they're bearish.
Comical, perhaps, but hardly unreasonable. Investors who can still get away from Saylor's brainchild with some cash, can likely find far safer places to wait out the tech correction than in MicroStrategy's corner.
Stone covers the markets for Business Week Online What's your take on MicroStrategy? Talk about it on our Ask Amey Stone Forum
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