At what point do cryptocurrency investments grow so large that they become irresponsible? That’s the billion-dollar question that you’ll definitely want to ponder before you even think about purchasing Microstrategy (NASDAQ:MSTR) stock. Even if you’re a fan of Bitcoin (BTC-USD), I still recommend caution, and I am currently neutral on MSTR stock.
Microstrategy, whose founder and chairman is famous financier Michael Saylor, develops software-as-a-service (SaaS) – or at least, that’s what the company mainly did before Saylor redirected Microstrategy’s business model. Lately, as we’ll discuss, the company has been doing something that has nothing to do with developing SaaS products for businesses.
Maybe I’m going too far in calling Microstrategy’s strategy irresponsible. That said, when a stock’s trajectory is too closely associated with one digital currency, investors ought to pause and think carefully before making any hasty decisions.
Yes, Microstrategy Does Sell Software
The financial media doesn’t spend much time talking about this, but Microstrategy does actually generate some revenue from selling software. The company claims to be a “pioneer in AI-powered business intelligence,” though I’d be more likely to assign that title to Palantir Technologies (NYSE:PLTR).
Still, Microstrategy did recently release an updated software product with an artificial intelligence (AI) angle. Specifically, the company unveiled its latest version of MicroStrategy ONE, which layers “contextual, bite-sized AI insights into any application within a no-code environment.”
That’s a big claim in terms of interoperability. Does MicroStrategy ONE actually work with “any application”? I’d be curious to see this put to the test with a wide variety of applications.
If so, then maybe Microstrategy will actually be an AI “pioneer,” as the company purports to be. Supposedly, MicroStrategy ONE will enable everyone from sales representatives and medical personnel to call-center agents to “access critical information quickly while assisting customers, enabling data-driven decision making throughout the entire organization.”
Somehow, I feel like MicroStrategy ONE is treading on territory already covered by Microsoft’s (NASDAQ:MSFT) Copilot and other software products. Plus, if Microstrategy is truly inventing something new here, bigger fish in the pond (like Microsoft) will probably release similar and/or better products soon.
Nevertheless, it’s too early to pronounce any definitive judgment about Microstrategy ONE. I’ll give Microstrategy the benefit of the doubt for now and recommend that investors should closely monitor the company’s income statement for improvements (if there are any).
Microstrategy’s Strategy: Courageous, Or Just Reckless?
There’s a fine line between courage and recklessness. Ask yourself – would I suggest that an investor should commit more than half of his portfolio toward one highly volatile asset? If the answer is no (which I hope it would be), then it’s time to ask some serious questions about Microstrategy’s and Saylor’s ultra-aggressive cryptocurrency buying strategy.
Typically, it’s only during steep price drawdowns that the public remembers how volatile and risky Bitcoin actually is. I’m not saying that you shouldn’t own a small amount of Bitcoin. Yet, let the recent Bitcoin pullback serve as a reminder that it can go down as fast as it went up.
Sure, Bitcoin can serve as a tool for portfolio diversification and hedging against dollar inflation/devaluation. However, overbuying any cryptocurrency is dangerous. It doesn’t take an earth-shattering event to pull the Bitcoin price down.
Not long ago, Bitcoin dropped from $70,000 to $58,000. There wasn’t an economic recession, and many risk-on technology stocks continue to hover near their all-time highs. Rather, it was mainly Mt. Gox repayments and miner sales that precipitated the Bitcoin sell-off.
None of this would matter much if Microstrategy stuck to AI-embedded software sales as the company’s business model. However, under Saylor’s leadership, the company has behaved like an amateur investor who gets too excited about buying Bitcoin.
Per TheFly, Maxim analysts stated (and Barron’s confirmed) that Microstrategy accumulated 226,331 Bitcoins as of June 20. This Bitcoin hoard was valued at approximately $13.4 billion and represented 55% of Microstrategy stock’s value.
Needless to say (but I’ll say it anyway), 55% is too much. Heck, even half of that would be too much Bitcoin exposure with the associated risk and volatility.
On top of that, I’m not a huge fan of borrowing money to buy Bitcoin, which is reportedly what Microstrategy did. Bernstein analysts reported (per CoinDesk) that Microstrategy “has raised $4 billion of convertible debt to buy Bitcoin.” Moreover, a Bloomberg report confirmed that Microstrategy recently “bought approximately $786 million in Bitcoin with the proceeds raised from the sale of convertible notes.”
Again, Microstrategy is borrowing money – which the company will have to repay with 2.25% annual interest by 2032 – to buy a veritable boatload of Bitcoin. That’s a very high-risk strategy, to put it politely.
Worse yet, there are share-value dilution concerns. Remember, these are convertible debt notes, which Microstrategy could convert into common shares. As the company acknowledged, “The notes are convertible into cash, shares of MicroStrategy’s class A common stock, or a combination of cash and shares of MicroStrategy’s class A common stock, at MicroStrategy’s election.” Thus, it sounds like Microstrategy can pull the trigger at any time and flood the market with a whole lot of common shares.
Is Microstrategy Stock a Buy, According to Analysts?
On TipRanks, MSTR comes in as a Strong Buy based on seven unanimous Buy ratings assigned by analysts in the past three months. The average Microstrategy stock price target is $2,142.29, implying 64.5% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell MSTR stock, the most profitable analyst covering the stock (on a one-year timeframe) is Andrew Harte of BTIG, with an average return of 133.06% per rating and an 86% success rate. Click on the image below to learn more.
Conclusion: Should You Consider Microstrategy Stock?
It’s fine to own Bitcoin, and therefore, it’s fine to own Microstrategy shares, as long as you do it in moderation. Just understand that Bitcoin is prone to wild price swings, and Microstrategy is ultra-aggressive when buying Bitcoin.
I would go so far as to call Microstrategy’s strategy of borrowing money to buy Bitcoin reckless and irresponsible. That’s a hot take, but I’m not denying Microstrategy’s potential pioneer status as an AI software developer. However, when all is said and done, I am neutral on Microstrategy stock and am not considering buying it now.
