MicroStrategy was downgraded by Prudential, Friedman Billings, and First Albany analysts last week after the company reported disappointing second-quarter earnings. None of these analysts lowered their ratings after an accounting scandal and subsequent SEC investigation conspired to knock the share price more than 90% off its high.
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In the aftermath of the earnings shortfall, MicroStrategy replaced its chief financial officer yesterday, promoting another inside executive to that role. One wag familiar with the situation at MicroStrategy said that the company was finally getting some "adult supervision." MicroStrategy's stock has dropped more than 93% -- from a high of $333 per share down to a current level of $21.
And, that's what is interesting about the fact that analysts from Friedman Billings Ramsey (NYSE: FBR), Prudential, and First Albany (Nasdaq: FACT) waited until now to drop their ratings on the stock. Sell-side analysts are ostensibly paid to know a company backwards and forwards so they can provide investment advice to their customers. None of the three that downgraded the company last week made a move earlier. And, of the 11 analysts who cover the company, none managed to catch the fact that the company was on the wrong side of the law with its reporting methods. They were scooped by Forbes.
What's more, only one -- Merrill Lynch (NYSE: MER) -- quickly acted on this information once it became public, pushing the company down to "LT accumulate." But, now that the company misses earnings estimates (or more appropriately, lost more than expected), we have a stampede of downgrades?
Not the best way to tend your flock, to my mind. But maybe I'm jumping to conclusions here. The analysts could have been busy, or maybe they've been on vacation. MicroStrategy goes through a highly public scandal, gets pummeled in the market, and is met with silence. Then it misses an estimate and is strung up? Maybe we shouldn't say "strung up" -- FBR dropped it from "buy" to "accumulate," First Albany from "strong buy" to "buy," Prudential from "accumulate" to "hold." What is the difference between "buy" and "accumulate" anyway? How do you accumulate a stock without buying it?
Rearranging Deck Chairs on the Titanic
Phew. I feel better about only reporting this a week late. We've spoken at length about the danger of individual investors putting too much faith in the pronouncements of Wall Street analysts, and we've also told investors ad nauseum to avoid companies that have whiffs of accounting improprieties. Well, here's a nice example of the worst-case scenario of both.
MicroStrategy may well get back on its feet, or it might burn through its newly raised cash haul. One thing's for sure, though: The vast majority of investors who trusted the company, its accountants, or the analysts covering it have been burned badly.
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