MSTR Short Thesis

rei3 technologies

Thesis
REI3 Technologies initiates MSTR at SELL with a price target of
$110 per share.
MSTR has all the tell-tale signs of a company in decline

Declining EPS
Stagnant revenues
Core product revenues declining at double-digit levels
Sunsetting business model (installed application)
Execution issues / increased employee dissatisfaction
Weakening competitive position

While MSTRs restructuring efforts are a step in the right direction

financially, the drastic cuts will further erode the companys already
weakening competitive position.

The company is going through their biggest transitional period ever

and the current price of the shares do not reflect the potential risks
of this transition.

MSTR: Average annual revenue growth

from 2012 2015: -6%
2%

2013

1%
2014

2015

-9%

Revenue Mix
$600

Annual Revenue ($M)

$500

153

138

136
101

Other
services

$400
$300

262

278

296

282

Subscription
services

$200
$100

Product
support

12

147

148

126

119

2012

2013

2014

2015

22

28

$0

Product
licenses

Why Is MSTRs Top Line Declining?

MSTRs core product is an installed
application
$119M revenue in 2015 or 24% of total
High margin (93% GM in 2015)
Becoming obsolete due to competition
from cloud based apps (sales declining at
5% YoY)

MSTR is making in-roads into cloud

based apps, but still lags far behind
competition
$28M rev in 2015 or 5% of revenue
Moderate growth (25% YoY in 2015)
Moderate margin (53% GM in 2015)

Key Product Issues

Core product is no longer in demand and quickly
becoming obsolete due to rise of cloud solutions.
Microstategys cloud product is growing at a moderate
rate, but is much less profitable.
Market for cloud-based business intelligence software is
increasingly competitive and crowed.
Large competitors (i.e. MSFT, IBM, ORCL) seeking expanded
market share are willing to sell software at razer thin
margins.
Microstrategys current cost structure does not support
shifting to a subscription based / cloud revenue model.
MSTR has 2 choices: grow revenues or scale back
expenses.

Managements Strategy:
Drastically Cut Expenses
With stagnating revenues, management
embarked on a strategy to radically reduce
operating expenses.
In September 2014, MSTR announced the first
layoffs in the companys history
Reduction of 10% of their workforce in NA
Drastically scaled back many employee benefits
Total cost = ~$15M

Wall Streets Reaction

"I think they have to do it," Urban
said. "You have to turn a profit or
you're just going to burn through
your cash."
- Pete Urban, Analyst, AMR Research
"Wall Street will respond favorably to
the move, to see that executives
know where to go to trim the fat
- Bob Moran, Analyst, Aberdeen
Group

Recent Events
4/27/16 - Q1 Earnings Miss
Revenue: $119M vs. $126M est
EPS: $1.24 vs. $1.90 est

There is some decrease in the EPS

number.. but I think when you consider
the impact of software capitalization
and some of the currency hedge, uh,
impact, on our business I think that
its not as big as an issue as it might be
otherwise. Those two line items are
pretty big swings.
- MSTR CEO Michael Saylor 4/27/16

Declining Employee Morale

Snapshot of recent reviews from Glassdoor.com
Apr 21 1/5 Very limited growth. Not likely to ever
recover strong revenue growth and the company is
experiencing a slow death"
Apr 8 1/5 - "Worst environment I have ever worked in.
Don't come here if you want to watch your soul die
Apr 6 1/5- Where dreams go to DIE, BEWARE of ALL
positive/glowing reviews, youve been warned!
Mar 4 1/5 - "Dreams and souls go here to die."

Reduced employee morale could be a signal for

increased turnover going forward.
Given the negative perception, difficult to attract top
talent and poach from competitors.

Competitive Landscape
$MSTR is a pioneer in the analytics sector
company was founded in 1989.
However, the company has been slow to adapt to
changing computing trends specifically the shift
towards cloud applications.
Historically, Microstrategys product was an
installed application, not a cloud app.
Company still lags far behind competing cloudbased analytics providers.
Cutting R&D by ~50% will make it even more difficult
to achieve parity with competition.

Premium Valuation
Despite the declining revenue totals, weakening
market position, and questionable growth prospects.
MicroStrategy still commands a relatively high
valuation.
EV / EBITDA: 10.79
EV / Revenue : 3.17

To back into current valuation of $189 per share,

MSTR would need to..
Meet analysts EPS expectations in 2016/2017
Achieve annual EPS growth of 27% from 2018 onwards

Key Takeaway: MSTRs stock is priced for perfection

and leaves little room for error

Financial Modeling
Using more realistic assumptions based on
historical trends, proprietary DCF model suggests
MSTR is worth $110 per share.
Downside potential: -42%

Financial model and assumptions are available

see contact page.
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