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Anh Hoang
Anh Hoang
Articles (264)  | Author's Website |

MicroStrategy: The Consistent Cash Generator with Very High Valuation

November 07, 2011 | About:

MicroStrategy (NASDAQ:MSTR) is a technology company providing business intelligence software to enable companies to report, analyze and monitor the data stored across the enterprise so that clients know the trends and insights to make better business decisions. With the business intelligence market, there are four key business demand drivers: the increase in user access and scalability, data scalability, supply efficiency and distribution efficiency improvement.

Even with the growing trend in its stock price since 2002, MSTR has experienced several price swings over the past 10 years.


The stock price rose significantly from the bottom of March 2009 until July 2011, from $34 to $170, with the compounded return of nearly 104% per year in the last two years and a quarter. Just at the end of October, the price dropped more than 18.5% in just several days. Is it cheap enough to buy? Or does the fundamental value still seems to be low compared with the current market price?

The good thing about MSTR's operating performance is that the revenue has kept increasing over time over the last 10 years, and the company managed to have positive operating income for nine years, positive net income for the e8 out of 10 years based on historical data. Fluctuating a little bit on year-over-year basis, the average income of the past 10 years stayed around $46.6 million.

USD million 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Revenue 180.41 147.82 175.57 231.2 268.66 313.82 350.67 360.39 377.78 454.57
Operating Income -27.25 14.62 29.67 68.45 93.86 99.79 88.22 67.8 86.3 50.58
Net Income -80.86 38.11 -3.9 168.31 64.74 70.87 58.46 41.83 74.83 43.79

In regard to cash flow, MSTR is considered to generate quite a good stream of operating and free cash flow over time. The average cash flow for operating cash flow and free cash flows are $68 million and $58.4 million respectively.

USD million 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
CFO -4.86 -2.66 36.64 85.55 102.55 104.41 97.89 88.91 96.44 75.82
FCF -6.74 -3.5 31.29 75.64 99.72 99.61 91.77 58.75 78.18 59.54

For financial health, MSTR is quite liquid, with nearly 45% of total asset in cash, with nearly no interest-bearing debt. When we first glance at the debt/asset ratio, and see it is an unhealthy figure of 60.5%, it is just because of the high level of Treasury stocks sitting as a negative number in stockholders' equity. Even with the market capitalization of $1.25 billion, adjusting the level of cash and no debt, the enterprise value of MSTR stays around $1 billion.

For the relative valuation of the market on the company over time, we can see that with this current price it is quite expensive, in both earning multiples and cash flow multiples.



The highest valuation was detected to be in the time between 2003 and 2004, and now it is coming quite close to that high level. The current TTM P/E stays at 48x and cash flow multiples is 24.7x, not attractive for both relative and stand-alone valuation.

A recent article on Motley Fool says MSTR is having positive signs because it has low intangible asset ratio (2%) and good positive tangible equity. That is true; however, with this current price and the high P/E and P/CF metrics, I would definitely not buy into this position for now. For MSTR, I think the current fundamentals of the business would justify a lower price.

This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.

About the author:

Anh Hoang
Money manager in global equities, especially in U.S. and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam.

Visit Anh Hoang's Website

Rating: 4.1/5 (11 votes)


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