There is a lot of uncertainty in both the cryptocurrency and stock markets due to geopolitical tensions and inflationary pressures. In the midst of this, MicroStrategy (MSTR), which offers an indirect way to expose one’s investments to Bitcoin (BTC), becomes a very risky prospect.
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MicroStrategy is a company focusing on integrating Bitcoin as a core part of its operations. I don’t think that investing in MicroStrategy is a good idea. The risks involved in supporting the stock currently would be too much for it to be sustainable in the long term.
Bitcoin lost considerable value over the past several months, and the company’s recent results reflect that. Additionally, it has a weak software segment. These factors are putting significant pressure on the already shaky financial condition of MSTR.
Even if Bitcoin does stabilize, there’s no saying how long this company can remain solvent. Therefore, unless you are an aggressive speculator, this cloud-based services provider does not provide much merit.
On TipRanks, MSTR scores a 3 out of 10 on the Smart Score spectrum. This indicates a potential for the stock to underperform the broader market.
The Dilemma for MicroStrategy
MicroStrategy delivers tools for decision-making and mobile apps for businesses. The company also specializes in cloud-based services to help you complete your tasks quickly – it’s a great choice when looking for a new tool. Since 1989, MicroStrategy has been at the forefront of managing business data. It offers top-quality software that provides a vast array of benefits to businesses.
The company’s business strategy entails expanding the size of companies that use its analytical software. However, another major area is purchasing and holding the wildly popular cryptocurrency, Bitcoin. Thanks to its outspoken CEO, Michael Saylor, the company has gained a reputation as an institutional backer of the coin. This led to the MSTR’s price action closely following that of Bitcoin’s, making it an attractive asset.
As a business investment strategy, Bitcoin opens up many opportunities for the company, such as hedging against inflation. MicroStrategy’s senior management, including its CEO and CFO, are huge proponents of Bitcoin and are among the more notable cheerleaders of digital currency.
However, with the recent Bitcoin price drop from April 2022 onwards, investors have been spooked and the share price has fallen considerably. As fear sets in, the company’s future sustainability is uncertain.
The business intelligence company’s total holdings of Bitcoin currently stands at 129,218 coins. As BTC came down in price, it didn’t bode well for the company’s long-term strategy of accumulating Bitcoin without intended sale, which is financed through the issue of long-term convertible notes.
Bitcoin may not be sustainable for the company in the long run. If it dips below $21,000, an automatic margin call will trigger that would lower the company’s position and value.
Fundamentals are Under Pressure
The first fiscal quarter wasn’t good for MSTR, with earnings falling short of expectations. The company lost $130.8 million against the same period last year, and its stock price didn’t fare well either, falling by more than 20% in the aftermath of the announcement. However, a substantial portion of the company’s losses stems from its Bitcoin holdings, which have incurred impairment.
Moreover, there has been a steady decline in revenue over the years. This indicates that software sales in the company are unsustainable and need to be corrected if the company wants to continue.
Meanwhile, in the first quarter of 2022, MicroStrategy incurred Bitcoin-related losses of $170.1 million and aggregate losses grossed up to $901.3 million in 2021.
MicroStrategy faced its most challenging year in 2019, with declining revenue and earnings. It has also experienced a similar drop in 2020, but its shareholders were happy with stable earnings. The trend did not last long enough to get excited about it, though, as its EPS saw a drop again at the beginning of 2022. Investors are worried about the underlying software business because negative earnings were partly due to Bitcoin impairment losses. On balance, the underlying software segment is not doing well.
The company’s revenues have been steadily declining for some time, and there is no sign of a turnaround. The management has indicated that they want to address these concerns, but it will take time for the cloud-based services provider to prove its mettle and convince investors it is on the right track.
Hence, MicroStrategy has a greater downside risk because its price is more volatile than that of Bitcoin.
Wall Street’s Take
Wall Street’s opinion on MSTR is bullish. The business intelligence company holds a Strong Buy consensus rating based on three Buys and one Hold. The stock has an average price target of $539.33, which represents a 12-month potential upside of 129.07%.
The Bottom Line on MicroStrategy
What’s wrong with MicroStrategy stock? If Bitcoin falls and business remains good, you might be in for a good deal. However, if Bitcoin falls too much, then the company may go out of business altogether.
MicroStrategy’s management believes in the potential of Bitcoin and has a strong commitment to it. But Bitcoin’s downward trend has not helped, especially with software generating less revenue. The company is not in a stable position, and if Bitcoin does not return to its former highs soon, MicroStrategy is in big trouble.
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