MicroStrategy Is A Good Business At A Value Price
If there is one frustration in dealing with value-based stock screens, it is the simple fact that - while they certainly uncover statistically cheap stocks - oftentimes those stocks underlie companies that are not particularly attractive for investment.
This makes sense, of course. The stocks of mediocre or even poor businesses trade at lower multiples of earnings and sales than those of good businesses. This will always be the case, and it should be.
Perusing the Magic Recipe Spell, there are plenty of companies we rate as "red dot", or fundamentally unattractive business models. But there are also some yellow dot stocks (modestly attractive), and even a few green dots (highly attractive).
Naturally, we would rather buy value stocks of good businesses than those of less attractive ones. So choosing the yellow or green dot companies in any screen is likely to be a more worthwhile proposition.
One such yellow dot entry in the Magic Recipe Spell we will take a look at today: MicroStrategy (MSTR).
Business software is a pretty good business to be in, in general. The revenue models are often recurring, ensuring a steady stream of cash flows and protecting against a devastating and rapid deterioration of business. Switching costs are frequently high, as most companies are conservatively managed and once invested in a software platform, are slow and loathe to change unless the advantages of doing so are substantial. Software on its own has some great characteristics, including no inventory, low capital expenditure requirements, and easy scalability.
All of this is true of MicroStrategy's business intelligence software platform. The company also maintains a very attractive financial profile, with over $600 million in cash, no debt, and voluminous free cash flow generation. The valuation is interesting, as well, with a P/E ratio of 17 and a P/S ratio of 2.9. For comparison sake, contrast that against primary competitor Tableau Software (DATA), at a P/S ratio of nearly 7.0!
There is no free lunch in the stock market, though, and this company has serious concerns and risk factors. The stock has been sold down significantly in 2017 as the firm continues to struggle with revenue growth as competitors such as Tableau and TIBCO continue to take market share. Revenue is actually down over the past 5 years, a real problem in what has been a market growing at double digit rates. Founder and CEO Michael Saylor is rather infamous. He has built a successful business, but has also come under fire for accounting investigations, ridiculous executive perks and compensation, and an overall air of arrogance. While the company has opened up its shareholder communications policies, and Saylor has pledged to invest more in the company to re-invigorate revenue growth, the fact is that right now, MicroStrategy is a bit of a laggard in a market it helped invent.
Still, an attractive business model in a value screen is always worth a closer look. See below for our Business Model Diligence report on MicroStrategy, and check out our membership offering to get similar reports on over 100 other stocks.
Business Model Diligence
Quick Business Summary
MicroStrategy is a business intelligence (BI) software provider. Business intelligence software organizes and presents huge stores of data in a way that allows analysts and executives to make important strategic decisions. MicroStrategy earns revenues in a variety of ways. Software product licenses (around 17% of revenue) consists of licenses for on-site installations of its software. Subscription services (7%) are annual subscription fees to use MicroStrategy's "cloud" hosted software offerings. The largest category, by far, are product support revenues (59%), consisting of recurring technical support and maintenance contracts. Finally. the "other services" umbrella (18%) provide consulting and education service offerings.
Does it have rising, recurring revenues?
SOMEWHAT. For certain, the bulk of MicroStrategy's revenues are of a recurring nature, including subscription and product support, and the company expects more future business to move into the subscription model. Software product licenses are perpetual (i.e., non-recurring), and consulting/education offerings are transactional. On the growth side, MicroStrategy has stagnated, with 2016 revenues actually lower than 2011, while competitors like Tableau continue to take market share.
Does it have durable moat characteristics?
SOMEWHAT. Like most business software, we feel there are some level of HIGH SWITCHING COSTS for an enterprise to change their fundamental BI platforms, as it is a large effort in both time and money from an IT (implementation) perspective and a business (education andusage) one. However, we see these switching costs as not insurmountable, as BI platforms leverage data stores that can be relatively easy to migrate to new analysis platforms, and do not usually manage or collect data in a proprietary way.
Business Model Rating
We think MicroStrategy is a classic case of a YELLOW (somewhat attractive) business model. We like the fact that revenues are largely recurring, and that there are meaningful moat characteristics in the form of modestly high switching costs. The company is also financially strong, with substantial free cash flows and a debt-free balance sheet. However, the stagnating revenue growth figures and corresponding success of competitors are serious concerns.