Shares of MicroStrategy ( MSTR) were hammered for a second day in a row Tuesday as investors appeared to worry about an increase in the company's tax rate.

Shares of MicroStrategy, which makes business intelligence software, fell $4.94, or 8.6%, to $52.73 Thursday. That drop came after the stock fell $3.53, or 6.1%, Monday.

In the past two days, at least two sell-side analysts have raised the possibility of the company's tax rate going up substantially after reviewing the company's 10-K filing with the Securities and Exchange Commission.

"Investors should also be aware that MicroStrategy benefits from extremely low effective tax rates because of its net operating loss carry-forwards," JMP Securities analyst Pat Walravens wrote Monday. "An increase in effective tax rates would likely reduce forward EPS estimates for MicroStrategy." (Net loss carry-forwards are accumulated net losses that can be used to offset future profits, reducing a company's tax bill.)

Basically, McLean, Va.-based MicroStrategy has had a low tax rate because of its string of losses in four out of the last five years. MicroStrategy has accumulated $290 million in domestic net operating losses carry-forwards that do not expire until 2019 and $24 million in foreign net operating losses that begin to expire in 2005.

MicroStrategy generated 34% of its total $175.6 million in revenue in 2003 from international operations, where it stands to get socked first by a bigger tax bill, Walravens observed. Its foreign operations registered $7.4 million in net income from continuing operations before taxes last year, while its U.S. operations posted a $14.5 million net loss from continuing operations before taxes, according to the 10-K filing.

"If MicroStrategy generates more income than it has net loss carry-forwards in certain foreign jurisdictions, it may see its effective tax rate increase," warned Walravens, who has a market underperform rating on MicroStrategy. (His firm hasn't done any banking with the company.)

Walravens' 2004 earnings estimate of $1.98 a share currently assumes a tax rate of 7%. If the rate jumped to 33%, his earnings estimate would suffer a big hit, falling to $1.42 a share.

Wedbush Morgan Securities analyst Nathan Schneiderman, who also highlighted the tax rate issue in a note Tuesday, described another scenario. Assuming a 4% tax rate in 2005, he estimates EPS of $2.61.

But assuming a 25% tax rate would push down his 2005 EPS estimate to $2.03. "A higher effective tax rate would ... depress the potential for significant EPS upside relative to the consensus," wrote Schneiderman, who has a buy rating on MicroStrategy. (Wedbush Morgan hasn't done banking with the company.)

The consensus estimate gathered by Thomson First Call projects MicroStrategy will earn $1.91 a share on revenue of $195 million in 2004 and $2.27 per share on revenue of $216.9 million in 2005.

In a telephone interview, Schneiderman noted that the higher tax rate does not affect cash flow. But MicroStrategy is probably not unique in facing the specter of higher tax rates taking a bigger bite out of earnings, he added. Other companies with a history of losses finally turning the corner to profitability could end up in the same boat, he said. "Investors have to be careful," he said.

However, Tom Barry, chief investment officer with Bjurman Barry and Associates, downplayed the significance of higher tax rates on MicroStrategy and suggested investors are putting too much emphasis on slight negatives. "I just think there's a lot more issues that are going to positively impact the company rather than negatively," said Barry, who is long MicroStrategy shares. "The main one is the tremendous economic growth that we have right now and the fact that more and more companies are investing in their intelligence software."