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Strategies & Market Trends : Trader J's Inner Circle -- Ignore unavailable to you. Want to Upgrade?

To: Softechie who wrote (36609)	10/27/2000 10:58:14 AM
From: LTK007	Respond to of 56535

Sector of the Day: Don't Follow This Microstrategy Mitch Ratcliffe, Columnist Friday October 27, 10:20 am Eastern Time Despite beating estimates and falling to bargain lows, Microstrategy's still not a buy. Has Microstrategy (Nasdaq:MSTR - news) turned it around? The company wiped out consensus First Call estimates in the third quarter, reporting a loss of 37 cents a share compared to the 53-cent loss anticipated by analysts. The company said it would ``break even'' in 2001. I may be cited for picking on Microstrategy, as I recently suggested that investors sell shares when it hit 34 on September 5. Thursday, Microstrategy closed at 23. Call me a bad sport, but the market-beating numbers announced yesterday hide a raft of problems that will likely prevent investors from seeing a real profit from Microstrategy for years to come. Investors may be tempted to jump back into this once high-flying stock on the apparent good news from this last quarter. Underlying Losses The company actually lost $2.13 a share because of charges associated with the shareholder suits, restructuring and preferred dividends. For instance, preferred shareholders took home $2.18 million - up from $0 in 1999, before the company restated earnings for 1997, 1998 and 1999. In other words, preferred shareholders, many of whom presumably have had a role in the mismanagement of the company, got 1% of revenues this quarter. Microstrategy did see revenues increase 84% year-over-year this past quarter. Much of the gain came from a nearly 100% increase in product support and services revenues; the cost of delivering that support and service rose by 271%. That makes it very hard to take seriously management's statement that it expects costs to grow slower than revenues in 2001 - the serious mismatch between revenue and costs in the support and services business have to decline, not grow, in order for this company to approach profitability. Nevertheless, Michael Saylor, CEO of Microstrategy, touted the firm's ability to break-even by the end of 2001. Numbers Don't Add Up If, as the company advised Thursday, it will see revenue grow by between 40% and 50% next year, it would not break-even if costs increase even 10%. Sorry, but this feels like a repeat of Microstrategy's previous tendency to overstate its potential earnings. Moreover, the company will not actually turn a profit for some time - maybe years - after it reaches break-even, because it still faces the possibility of more lawsuits, extraordinary expenses related to restructuring and, yes, preferred dividend payments. Since I wrote about Microstrategy in September, institutional investors have added to their holdings: institutional holdings increased from 9% to 11.9%, roughly 29% of the float. Things That Make You Go 'Hmmm' Joseph Payne, vice president of worldwide marketing and chief marketing officer at Microstrategy, doesn't seem to agree with investors. He sold 21,500 shares at $27.88 a share on August 31. This, of course, is the guy who is responsible for revenue. Should investors reward this company, even though it's still selling for 9.5 times revenues and has a book value of 28 cents a share? Ask yourself that before you think about casting a positive vote for this dog. At 23, Microstrategy still isn't a good buy. The enthusiastic report by the company Thursday should not be interpreted as an indication that management has righted the ship. Ratcliffe is vice president and editor-in-chief of the ON24 Network, on24.com a personalized financial broadcast network for individual investors. He is also longtime executive and investor in the technology industry. Ratcliffe's insights and analysis of the high-tech industry will appear twice each week. He does not hold a position in any of the companies mentioned. Positions can change at any time. Go to www.worldlyinvestor.com to see all of our latest stories.