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Technology Stocks : MicroStrategy Inc. (MSTR)
MSTR 319.42-9.7%Jan 27 3:59 PM EST

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To: Carl R. who wrote (654)3/31/2001 2:17:36 PM
From: Carl R.  Read Replies (2) of 712
 
As we watch this company's stock price crumble, it provides an interesting learning opportunity. In order to show fast growth, they used some liberal accounting methods which later came back to haunt them as they were forced to restate earnings. But the problems ran deeper than that. It seems that they internally believed that they were really growing that fast and making money because their spending grew apace with the reported sales. R&D spending grew from $6 million in the 6-99 quarter to $16 million 3 quarters later. When revenues were restated that $16 million number turned out to be a whopping 32% of sales, almost 3 times higher than normal for a software company. Similarly sales and marketing expenses grew from $21 million in the 6/99 quarter to nearly double that 3 quarters later, which turned out to be 82% of sales, twice the industry average.

One interesting observation is that we tend to assume that when you invest in R&D and Sales expenses, those investments will produce growing revenues. MSTR thought they were growing much faster than they really were, and as a result they invested at a level way beyond the industry norm. Those expenditures apparently did not produce any excessive future growth. In March 2000, MSTR was out-spending BOBJ 2-1 on R&D, and out-spending them on sales expense as well, yet BOBJ at the time was 50% larger than MSTR and is now twice as big.

I expect MSTR will be an interesting case-study in business schools in the coming years. There is a lot that can be learned here, and my observations are no doubt merely the tip of the iceberg.

Carl
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