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Tuesday, September 3 | ||||
Turning Point
(MicroStrategy -- Weekly Chart)
It's easy using hindsight to pick out the turning points in market history. I think the crucial event that marked the end of the bull market in technology stocks was MicroStrategy's restatement on March 20, 2000 of its revenue and net income numbers for the past several years. As you can see from the chart, MSTR was one of the wildest performers of 1999, up a mere 508.7% on the year. It was a darling of the go-go momentum crowd, an uncritical group that ate up the company's reported gains in revenue and net income without questioning MSTR's accounting policies. 
(MicroStrategy -- Daily Chart)
The rules about recognizing revenue from sales of software is spelled out in Statement of Position 97-2. I won't bore you with the details, but the basic idea is that when you sell software that has "multiple elements," meaning upgrades, consulting services, etc., and these services are considered integral to the functionality of the software license component, then the seller must use contract accounting. Under contract accounting you can't recognize all the revenue at the time of sale, but that's what MSTR was doing, and that's a GAAP violation. As you can see from the table below, it makes a wee little bit of a difference in the reported numbers. ;-) 
(MicroStrategy -- Restated Net Income) MicroStrategy's subsequent collapse marked the turning point for the technology stock mania. The Nasdaq peaked later that week and has since dropped nearly 80%. We forgot (or never realized) that it was an accounting scandal that burst the bubble in tech stocks. |
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