Two months ago, I concluded that after a 53% rise between early January — when I first recommended it — and May 12, shares in analytics software maker MicroStrategy (NASDAQ:MSTR) had further to rise. Since then, the stock has risen 24% more and is up a whopping 85% this year after hitting a new 52-week high on Thursday.
Is it finally safe to say that MicroStrategy’s best days are behind it?
Behind the stock’s rise is an implicit put option – i.e., the possibility that the company might be acquired by a larger entity interested in expanding into the analytical software industry.
A case in point it IBM (NYSE:IBM), which is flush with cash that it intends to use for acquisitions. IBM, in particular, is very interested in analytical software, a topic about which I posted in April, and the company expects to generate $16 billion in revenue from selling analytical software by 2015. One way for IBM to achieve that goal would be for it to acquire analytical software companies — such as MicroStrategy.
Of course, there is a good chance that MicroStrategy will remain independent. If so, the question is whether the stock still has further to run or whether it’s now a good time to take that 85% profit.
Two recent product announcements could propel MicroStrategy into rapidly growing markets, according to Information Week:
- Gateway for Facebook would let companies trying to market to Facebook users target the most frequent communicators and influencers. Gateway for Facebook would do this more efficiently than competing products and thus enable marketers to get the highest return on their marketing investment.
- MicroStrategy Cloud would let companies analyze their data on MicroStrategy’s computers, taking advantage of the rapidly growing demand by companies to outsource their computing — so-called cloud computing.
However, there is one reason to pause on MicroStrategy: first-quarter earnings that missed expectations. Although its revenue was up 31%, its earnings badly missed Wall Street expectations. However, investors appeared to view this big miss as an aberration.
On the other hand, there are three offsetting factors that strengthen the case for even more upside:
- Long-term growth and solid financial position. MicroStrategy has grown steadily. Its revenue has increased at an average rate of 11.2% over the last five years. However, its net income has been falling at a 7.7% annual rate over that period. But its cash has been rising while its balance sheet is clean. Specifically, MicroStrategy’s cash rose at a 22% annual rate between 2006 ($79 million) and 2010 ($174 million) and it has no debt.
- Out-earning its capital cost but more slowly. MicroStrategy earned more operating profit than its cost of capital, however it’s losing ground in that quest. MicroStrategy’s EVA momentum which measures the change in “economic value added” (essentially, profit after deducting capital costs) divided by sales was -5%, based on 2009 revenue of $378 million, and EVA that declined to $23 million in 2010 from $40 million in 2009, using a 9% weighted average cost of capital.
- Inexpensive stock. MicroStrategy’s price-to-earnings-to-growth (PEG) ratio of 0.9 makes it slightly undervalued (a PEG of 1.0 is considered fairly priced). MicroStrategy’s price-to-earnings ratio is 52.6 and its earnings are expected to grow 56.5% to $4.50 a share in 2012.
It looks like MicroStrategy still has further to rise — with one big caveat: If it doesn’t exceed earnings expectations when it reports second-quarter results, investors could suffer. Based on its ability to introduce new products that customers want, a drop in its stock price might be an opportunity to invest at an even lower price in this solid company.
Peter Cohan has no financial interest in the securities mentioned.
