By Jerry Knight
Monday, January 14, 2002; Page E01
Washington investors who wonder why the high-tech boom went bust -- and who worry about whether it could happen again -- should read Mark Leibovich's remarkable series in The Post last week on Michael Saylor and MicroStrategy Inc.
How Saylor turned what was once a $313-a-share stock and the biggest fortune in Washington into a $4.09 stock and a merely moderate number of millions is an amazing tale of hubris, hyperbole and high-tech hallucinations.
Once you've learned more-than-you-ever-thought-you-wanted-to-know-but-will- be-glad-you-read about the MicroStrategy founder, it's impossible to avoid one conclusion:
Saylor still doesn't get it.
Nor do a lot of people who made a lot of money during the tech boom.
Nor do a lot of investors who are back in the market buying technology stocks with the same dopey disregard for profits and growth that made Saylor an ephemeral billionaire to begin with.
In the latest round of irrational exuberance, technology stocks are inflating almost as fast as they did when the tech bubble was sucking in money two years ago. The Nasdaq Stock Market composite index has climbed almost 20 percent above where it was before Sept. 11. In the same time frame, the Dow Jones industrial average -- more closely coordinated with reality -- is up only a little more than 3 percent.
At today's prices, "about 70 percent of the tech stocks we evaluated appear overvalued," Merrill Lynch technology strategist Steve Milunovich cautioned Friday in a report to clients.
"To buy here, investors must believe that 2002-03 earnings will grow smartly," he said. The trouble, he noted, is that tech stock prices have already grown more than smart people think is justified by how much corporate earnings are expected to increase.
Example No. 1 for Merrill Lynch is Microsoft. Analysts are projecting Microsoft's earnings to grow 16 percent in the next year. But to justify buying Microsoft stock at the current price of nearly $69 a share, investors would have to assume profits will grow about 90 percent, Merrill's researchers calculated.
In other words, we're back to the bubble days, when investors convinced themselves that the traditional way of valuing a company's stock by comparing the price of the stock to the company's profits -- the price-to-earnings ratio, or P/E -- was old-fashioned and just didn't matter anymore.
Today the P/E ratios of the Dow, the Nasdaq composite and Standard & Poors 500-stock index are all at record levels. Milunovich said he is once again hearing the old refrain that "momentum is improving so valuations don't matter."
That was the theory, now totally discredited, that enabled some investors to rationalize paying more than $300 a share for MicroStrategy stock.
As Saylor still celebrates, at its peak MicroStrategy's total stock market value was more than that of DuPont, the Fortune 500 company where he worked before he left to start his own firm.
If Saylor were half as smart as he claims to be, he would have known that was nuts. A simple little software company, with sales of about $200 million a year, worth more than DuPont, which makes $200 million in profit every month?
It must be hard to recognize a bubble when you're inside one looking out.
The reality of MicroStrategy is that it was never anything but a third-tier software company, an outfit with a reputation and a stock price bloated by the bubble market in tech stocks.
MicroStrategy was no Microsoft, no Oracle, though Saylor fancied it one. On paper, he was richer than Oracle founder Larry Ellison and -- if that is possible -- had an even bigger ego.
A more appropriate corporate peer is Manugistics Group of Rockville. Manugistics makes very good software that helps corporations manage the flow of raw materials and finished products. MicroStrategy makes very good software that helps corporations mine nuggets of useful information from their mountains of data.
Their sales were in the same range for fiscal 2000 -- $270 million for Manugistics and $225 million for MicroStrategy. Since then Manugistics has grown -- $240 million in revenue for the first three quarters of 2001. MicroStrategy is shrinking, though, with sales of $140 million in those three quarters. Neither company is profitable.
Manugistics' stock market value is $1.37 billion, MicroStrategy's is just $378 million. The billion dollar difference is the growth curves and corporate credibility, and Saylor himself.
Saylor's value to MicroStrategy is interesting to look at in the context of new accounting rules that require corporations to write down the value of assets they acquire if the value of the assets is "impaired." (The rules are the reason why AOL Time Warner is taking a write-off of $40 billion to $60 billion to adjust for the decline in market value since its merger.)
There is no need for any balance sheet adjustments at MicroStrategy; the market has already marked down the value of the company to account for Saylor.
Saylor has always said that what made MicroStrategy different was him. He was "a visionary."
"I'm still a visionary," he told Leibovich. "I'm a bit more mature, maybe an older, wiser visionary."
A visionary who can't see, even in the rear view mirror of history, that the market that made him a mega-billionaire was 21st century tulip mania.
The inevitable implosion of the tech stock bubble alone was enough to guarantee that Saylor's MicroStrategy stock, worth $13 billion on paper, would be vaporized.
MicroStrategy was both a victim and a cause of the tech stock collapse. The stock and the Nasdaq stock market peaked on the same day, March 10, 2000.
The next day MicroStrategy admitted its glorious growth record was fiction, created by accounting practices that the Securities and Exchange Commission later determined to be fraudulent.
When MicroStrategy stock tanked -- wiping out more than $6 billion of Saylor's paper wealth in 6 1/2 hours of trading -- it took the Nasdaq market down with it. The bubble reinflated a bit, but it never recovered from being pricked by Saylor.
The Nasdaq index may not hit 5,000 again for years, even decades, Wall Street market strategists predict. And no one is forecasting that Saylor -- now worth $300-plus million on paper -- will ever be a billionaire again.
Yet even today, Saylor remains a visionary who can't look in the mirror and recognize his own worst enemy.
Nor, obviously can he recognize that he is an an enemy of investors as well. Saylor's distorted vision is symptomatic of the hype that drew so many investors into buying tech stocks at ridiculous prices and keeps them repeating that mistake even now.
What makes Saylor so dangerous to investors is that he is sincere. Though he was cited for fraud by the SEC, Saylor is not a con man. He genuinely believes in his vision, his own version of reality.
When another member of his generation of entrepreneurial millionaires joked to Saylor in a social setting that "you cost me a lot of money," the response, Leibovich reports, was something like "not as much as it cost me."
Not once in hours of interviews, Leibovich says, did Saylor express remorse about how much the collapse of MicroStrategy stock cost investors who bought the shares because they bought into Saylor's "vision."
At a stockholders' meeting last summer, Saylor sounded like a victim, telling a shareholder, "We went into the jungle, and the jungle was a pretty ugly place."
It wasn't the jungle that was ugly; it was MicroStrategy's bookkeeping. The company generated some of its growth by claiming it earned revenue on deals for which contracts hadn't even been signed. The company reported "sales" even though it had taken in no money and had delivered nothing but promises to the customer.
Leibovich captures Saylor ruminating about what might have happened if only the auditor who blew the whistle on MicroStrategy's illegal accounting practices had decided to go on vacation instead. The inevitability of his fate escapes him.
When Saylor was plea bargaining with the SEC, sweating to save his company and himself from bankruptcy, government lawyers insisted that Saylor and his colleagues, sitting face-to-face with their accusers, accept responsibility for the accounting fraud.
As Greg Bruch, the SEC lawyer who headed the investigation, told one of Saylor's attorneys, "I need to be convinced that these guys 'get it.' "
Maybe the SEC was convinced that Saylor gets it, but anyone who reads Leibovich's account of the man will find that hard to believe.