Want to terrify investors? Mention the word “restatement.” It does sound
like a harmless word. In fact, that’s the purpose — to make things sound
OK. But, of course, things are instead very bad.
Restatement is a word to describe when public filings have been, well,
wrong. Usually, they are overstated. Restatement is typically the result
of overzealous corporations who try to please Wall Street at any cost.
Yesterday, we saw a blatant example of the nightmare of restatement.
MicroStrategy (MSTR)
, which has been a darling of Wall Street, announced that it must
revise revenues for the past two years. What’s more, the profits reported
in 1999 were actually losses.
Wall Street reacted with incredible ferocity. The stock went into
free-fall, plunging 140 points to 86-3/4 (the stock has been as high as
$333). That eliminated about $11 billion in market cap.
With the counsel from the Securities and Exchange Commission (SEC),
MicroStrategy will take more conservative approaches to their accounting.
Basically, it will spread the costs of service contracts over the life of
the contracts. Kind of makes sense, huh? Well, in the Internet world,
accounting does not always appear logical. In fact, it would not be
surprising to see other companies come under the gun from the SEC. Internet
companies are under much pressure to show high growth rates. It is tempting
to push the limits of accountancy.
The change for MicroStrategy means that it is not a superfast company. The
1999 revenues will be $150-$155 million instead of $205.3 million. There
would also be a loss of 43-51 cents per share versus a 15 cent gain.
No doubt, the company is real; it is not a sham. The company develops
useful software for e-commerce companies. And, the company will continue to
grow. Unfortunately, MicroStrategy is tainted. Many investors feel
cheated, as well as burned.
Historically, companies that have major restatements have lengthy
recoveries — if they ever recover. Recent horror stories include Cendant
and Oxford Health, both of which are still reeling from their restatements.
So, while it may seem tempting to buy MicroStrategy because of the
seemingly low valuation, it would not be surprising to see the stock fall
even further. When under the eye of the SEC, accountants get very
conservative and so does the company’s growth rate.
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Alex Kanabe wrote:
“I think we should wait on MicroStrategy. The market is too volatile and it shows no signs of stabilizing. There could me more downside here.” Discuss it here
