Microstrategy's main business is struggling, but its side business in bitcoin is very profitable. The company plans to raise $42 billion in the next three years to continue buying bitcoin. After a surge of 1700% in 2022, some analysts are concerned about the 200% premium on the stock price, while others are looking forward to next year's new accounting standards valuing the company's holding of bitcoin at market prices, thereby reversing MicroStrategy's loss-making situation.
As the largest 'bitcoin proxy' in the US stock market, MicroStrategy's main business performance is mediocre, but its stock price is closely tied to bitcoin, with gains in the past two years even surpassing major bull stocks like Nvidia. However, there is disagreement among analysts about the future market prospects.
On October 30th, the latest financial report revealed that MicroStrategy's software business revenue declined by 10% to $0.1161 billion, below analysts' forecast of $0.1225 billion; net loss was $0.34 billion, marking the third consecutive quarter of losses, significantly larger than the $0.14 billion loss in the same period last year.
The main reason for the loss is that the company recognized a $0.412 billion impairment charge on its approximately $18 billion bitcoin inventory. Overnight, MicroStrategy announced plans to raise $42 billion over the next three years to continue buying bitcoin.
Despite poor performance, the stock price is nearly the strongest in the US stock market. Since 2022, MicroStrategy's stock price has soared by 1700%, outpacing Nvidia's increase of only about 870% during the same period. Among large US stocks, MicroStrategy's performance is second only to used car platform Carvana Co., whose stock price appreciated over 4300% after the bankruptcy panic subsided.
MicroStrategy's gains even surpass bitcoin. So far this year, MicroStrategy has surged by 300%, exceeding bitcoin's approximately 70% increase.
This is mainly due to its co-founder and chairman Michael Saylor's leveraged investment strategy: borrowing at around 1% interest through means like convertible notes financing to purchase bitcoin, while bitcoin has had a compounded growth rate of about 50% over the past four years.
The main business is struggling, while bitcoin is the side business with potential for high profits. After the sharp rise, does MicroStrategy still have room for further growth?
On one hand, some analysts believe that the current stock price is already too high above the asset value premium and is not expected to rise further. On the other hand, some analysts believe that under the new accounting standards next year, the valuation of the company's hold of bitcoin at market price will reverse MicroStrategy's loss situation, making the company's stock still worth "buying".
Leverage to buy bitcoin, need to continue in the next three years.
In August 2020, after the outbreak of the pandemic, MicroStrategy decided to invest in bitcoin to hedge against inflation. This decision turned this once little-known enterprise software manufacturer into the most prominent "bitcoin proxy" globally.
Over the past four years, MicroStrategy has issued approximately 40 announcements for bitcoin purchases, accumulating about $18 billion worth of bitcoin, making it the company holding the most bitcoin among US listed companies.
MicroStrategy initially bought with cash flow and later raised funds through convertible notes and other tools to buy with leverage. The company plans to explore other financing methods to purchase more bitcoin.
Saylor stated in a public event this month: "We essentially create leverage using the convertible debt market... over time, explore the fixed income market, consider issuing preferred shares - essentially an options swap."
MicroStrategy has announced its buying plans for the next few years. After reporting losses overnight, MicroStrategy announced plans to raise $42 billion over the next three years, including $21 billion in equities and $21 billion in fixed income securities, to purchase more bitcoin.
President and CEO Phong Le stated in a declaration:
"Our focus remains on increasing value creation for shareholders through the digital transformation of capital... As a bitcoin financial company, we plan to use additional capital to purchase more bitcoin as financial reserve assets."
Stocks are trading at a 200% premium, but there is hope for a "turnaround to profit" next year.
Concerns have been raised by analysts regarding the extremely high premium on MicroStrategy's stock price, but some analysts are optimistic about the potential bullish impact the change in accounting standards next year may bring to the company.
Currently, MicroStrategy's stock price carries a premium of over 200% compared to its asset value. Considering the decline in revenue and restricted cash flow, TD Cowen Inc 7.75% Senior Notes due 15/06/33 USD25 stock research director Lance Vitanza believes the stock's surge will come to a halt.
Vitanza has a "buy" rating on MicroStrategy and expects the price to stabilize between $200 and $215.
On the other hand, the introduction of new accounting rules next year could potentially turn the loss-making MicroStrategy into a profitable company. Currently, the value of bitcoin assets on MicroStrategy's books is only $6 billion, less than a third of the current market cap. If these bitcoins are revalued at market prices, it will bring in significant revenue for MicroStrategy.
According to analysts compiled by Bloomberg, the new accounting rules are estimated to bring MicroStrategy around $2 billion in net income next year, a stark contrast to this year's approximately $20 million loss.
Benchmark Co. director and CEO Mark Palmer stated: "The company will almost overnight shift from negative to positive income, not only improving its image, but also potentially being included in some indexes that require positive income." Palmer holds a 'buy' rating on MicroStrategy.
