As if you needed an example of what missing earnings estimates can do to a stock's share price, the past week's stock movement of business intelligence solutions provider MicroStrategy (MSTR 0.04%) is proof positive. Missing analyst estimates is bad, but missing them by nearly 50%?
What happened?
First, the management shake-up prior to its Oct. 29 earnings announcement sent shivers down the spines of shareholders. BMO Capital analyst Karl Keirstad based his subsequent downgrade of MicroStrategy on the upheaval, stating, "We worry that this change could have been a response to weak financial results or industry changes that are forcing MSTR to adjust." After the past week's nearly 22% decline in share price -- counting today's 13% drop -- needless to say, he nailed it.
The second development affecting the stock's drop in price involves the earnings announcement it missed by a country mile, and the manner in which MicroStrategy handled it. Or, to be more precise, didn't handle it.
Factors pressuring MicroStrategy
As my colleague Evan Niu wrote a week ago, MicroStrategy's change in senior management was led by the removal of long-time right-hand man Sanju Bansal from his COO position. That kind of thing can happen, of course, but Bansal had held the role for 19 years and helped found the company in 1989, along with CEO and fellow MIT alum Michael Saylor.
Phase two of the MicroStrategy saga is its historic reluctance to provide either earnings guidance or conference calls following up quarterly results: Nor should you expect them to going forward. I can only assume the "media silence" makes sense to someone at MicroStrategy's Virginia HQ.
The dichotomy of MicroStrategy
There are two sides to Microstrategy's lack of guidance. On the one hand, how are analysts supposed to gauge upcoming results with no input from the people in the know? The easy answer is, they can't. So, how much impetus should investors place on hitting -- or missing -- expectations that are clearly shots in the dark? It could be argued that in MicroStrategy's case, sequential and quarter-over-quarter growth (or lack thereof) should be the determining factors of its investment potential. Period.
Now to really throw a wrench in the works, a closer look at Keirstad's comments after sharing his concerns about the new management structure is warranted. Yes, he downgraded Microstrategy after the news, then proceeded to lower his target price to $130 a share, from $150. Not be outdone, FBR Capital upped its target on MicroStrategy Oct. 31 to $125, from $120 a share. After today's freefall? MicroStrategy is trading in the mid $90s. Hmm.
Stranger still? The results weren't that bad
MicroStrategy's $0.43 a share earnings on $143.7 million in revenues were essentially flat vs.Q3 of 2011, but well below the analysts expectations of $0.84 a share. The $4.8 million in net earnings Microstrategy (grudgingly) announced this past quarter, compared to last year's $4.9 million, is hardly worth celebrating. But when you consider 2011's Q3 included a $3.4 million pre-tax gain, suddenly 2012 compares favorably. And ready cash increased $17 million to over $216 million during the quarter, thanks to strong operating cash flow and decreased overhead.
Now what?
From a macro perspective, MicroStrategy and its brethren in the BI and big data space are facing an uphill battle. Corporate spending isn't where it needs to be, as Qlik Technologies (QLIK +0.00%) shareholders recently learned after it missed its own Q3 earnings estimates of $0.03 a share, in spite of increased earnings vs. the year-ago quarter. Splunk (SPLK +0.00%), the relative big boy on the block, is down over 21% the past month, even after introducing an upgraded version of its industry leading enterprise application, Splunk Enterprise 5.
It's a difficult time for the business intelligence and big data sector right now, regardless of circumstances. For MicroStrategy shareholders and prospective investors, its history of keeping mum on all things financial doesn't help matters. Publicly traded companies owe it to shareholders to keep them informed, particularly in an uncertain market environment. If you want to take a flyer, MicroStrategy has considerable upside, at least according to several analysts. Of course, they have no more information than the rest of us, so tread carefully.
