MicroStrategy stock has rallied considerably on the back of Bitcoin’s meteoric rise. The resulting increase in market capitalization has set the stock on the path to a Nasdaq 100 inclusion. While the news may be positive for many, some are wondering if the company will be able to handle the success, especially if the Bitcoin price reverses.
MicroStrategy is known for its large stockpile of Bitcoin, owning 2% of all Bitcoin in circulation. However, the company actually runs a business intelligence, mobile software, and cloud services business. Its data-driven analytics capability is instrumental for many organizations, though they don’t get their fair share of the credit thanks to Bitcoin.
With the company’s focus on Bitcoin and a price rally in both Bitcoin and the company’s stock, many have lost track of the company’s underlying business. We believe a case can be made that everything good that could have happened to the stock has already happened, except of course the possibility of a Nasdaq inclusion, which we will find out tomorrow.
When everything’s going well for a company that is taking huge risks, it is usually the best time to get out. However, the type of investors who are attracted to a company like MicroStrategy do not follow the norms of cautious investing. They will continue to pile into the stock, but a few things need to be considered while doing that.
MicroStrategy plans to buy $42 billion of Bitcoin in the next few years. It will achieve this through its ‘21/21 Plan’, where it will raise $21 billion through convertible debt and $21 billion through at-the-market offerings. Were it not for the Bitcoin rally, investors would have already run for the hills. But they continue to ignore what is quite obvious to many.
If the company is added to the Nasdaq tomorrow, questions will be asked about its business. The company’s profitability is on a downtrend in its business intelligence segment. The massive share dilution to amass its Bitcoin holding has and will continue to exert downward pressure on its EPS. The company had just above 10 million outstanding shares 5 years ago. Today, the figure stands at over 216 million. This will continue to dilute further as the company starts executing its 21/21 Plan.
We are therefore bearish on the stock. The Nasdaq inclusion will benefit the company in the short term, but we believe the underlying business is not strong enough to sustain scrutiny from Wall Street. Eventually, the house of cards will come falling down.
MicroStrategy does not rank on our latest list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 25 hedge fund portfolios held MSTR at the end of the second quarter which was 26 in the previous quarter. While we acknowledge the potential of MSTR as a leading AI investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as MSTR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
