MicroStrategy: Bitcoin’s Bearish Trend Could Lead MSTR to Fall

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I believe that MicroStrategy Incorporated (NASDAQ: MSTR) to be a sale. I lean towards this point of view because I consider that the risks are far too great for the investment in the title to remain sustainable in the long term. the bearish bitcoin (BTC-USD), if continued in this manner, could push the company dangerously to the brink of bankruptcy. Moreover, even if Bitcoin stabilizes, deteriorating performance of the software segment of the company adds to the unsustainability of the MSTR.

Company presentation

MicroStrategy Incorporated is a US-based business intelligence specialist specializing in analytical software tools to support business decision making. Moreover, the company also offers mobile apps and cloud-based services to its customer base. MicroStrategy has been in business since 1989 and has come a long way since then, with a market capitalization of over $3.5 billion and employees numbering over 2,000 as of May 2022.

Currently, the company’s business strategy has two fundamental dimensions, the first of which is an expansion of the expansion of its analytics software customer base, in order to maximize revenue and profitability, while simultaneously acquiring and holding the very popular cryptocurrency, Bitcoin. Given the company’s large stake in BTC, it has gained a reputation in the market as the quintessential Bitcoin-related stock, with its price movements shifting towards those of the digital coin. In April 2022, MSTR CEO Michael Saylor described the company as a quasi-BTC ETF.

As of March 31, 2022, the company declared on its balance sheet 129,218 units of Bitcoin which held a market value of $5.9 billion as of the same date. Currently, as of May 11, 2022, given the fall suffered by Bitcoin, these holdings now have a market value of $4.06 billion. This value represents a premium of approximately $1.16 billion to the $2.9 billion book value of the company’s assets. Bitcoin holdings.

Bitcoin theory, from a business strategy perspective, indeed offers significant potential for the business, ranging from a strong hedge against inflation, as well as an optimal protocol for the business to reach its market. softwares. The company’s management, for these reasons, had adopted a strategy whereby it was committed to “all in” on the coin, leaving it exposed to both the opportunities and risks of Bitcoin. However, increasingly, the costs of these Bitcoin benefits have become increasingly apparent, with the recent The fall of Bitcoin from April 2022, heralding a potential financial disaster for MSTR’s outlook and sustainability.

BTC Worries Fall and Margin Call Threats

To understand the dilemma that MicroStrategy is potentially heading into, it helps to understand its business strategy and the implications of a fall Bitcoin prices on stock sustainability. The company’s senior management, including its CEO and CFO, strongly believe in the potential of Bitcoin and are hailed as heroes among cryptocurrency enthusiasts. In keeping with their optimism about the potential for Bitcoin, since the first quarter of 2020, the company issues both debt and equity securities with the main purpose of acquiring Bitcoin.

A recent statement from MicroStrategy Chief Financial Officer Phong Le during the company’s first quarter 2022 earnings call revealed that a margin call would be launched once Bitcoin hits the $21,000 mark, reflecting a 50% margin, after which the company would be obligated to repay its long-term debt. That figure comes in at nearly $2.4 billion, which is a considerable amount for a company with revenue of just over $500 million, with its last quarterly revenue of $119 million. of dollars. However, in the event that the price of BTC falls below $21,000, the CFO said the company holds “quite a lot” of unsecured money. Bitcoin, which he would turn to, could help avoid the margin call. These unencumbered coins amount to 95,643 coins, out of a total of 129,218 coins held by the company. However, reducing its Holding Bitcoin to such a substantial degree, in the face of significant downside volatility, could prove highly unsustainable for MSTR’s long-term strategy, which is based on a long-term bullish assumption.

Bitcoin’s recent bearish slide goes against the fundamental assumptions of the firm’s core business strategy of accumulating Bitcoin, with no intention of selling, which it finances with long-term convertible notes. The coin has fallen nearly 50% in the last 6 months. A significant and persistent decline Bitcoin would trigger a freefall in MSTR, in addition to the potential margin call. I think this is a potential fatality that MSTR is exposed to as its debt securities and equity securities could collapse.

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Coindesk

Likewise, the Bitcoin’s fall prompted a clear reaction in bond markets, with the MSTR 2027 convertible bond falling to 60 cents as of May 9, 2022. As a result, the bond yield climbed to 10.8% on the same date, which is a substantial return given the high risk associated with the stock. I think that high bond yield is a key factor for investors to consider, as it is a clear indication of the risk associated with the business, given the substantial return set by the market relative to the risk assumed.

Another complication to add to the company’s woes is the possibility that the spring-loaded maturity feature of its convertible notes will be triggered in the event that specific liquidity requirements are not met. This amount is set at $100 million below the aggregate principal amounts of the 2025 and 2027 convertible notes and may extend to future convertible debt agreements. Once the spring feature is launched, payment terms for each of the convertible notes would be pushed back by 90 days, which would significantly reduce the likelihood of MicroStrategy repaying outstanding obligations. In the event that the recovery is financed, it would not take place under conditions favorable to the company’s shareholders.

Performance and Earnings

For the first quarter of 2022, MSTR’s latest earnings release, reported lackluster numbers, reporting a net loss of $130.8 million compared to the prior year’s comparable figure of a net loss. of $110 million. However, a substantial portion of these negative earnings is the result of the impairments the company has incurred due to its large Holding bitcoins. MicroStrategy generated revenue of $119.3 million for the quarter, 6% lower than expectations placed by Zacks consensus estimate.

The company’s revenue over the years, which shows a cyclical trend, has been steadily declining. This indicates that the software segment of the company is on an unsustainable trajectory that should eventually be reversed. I believe that if this is not strategically corrected, the stock’s business activities could not support its financial strategy of Holding bitcoins.

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Macrotrends (lower MSTR revenue)

Moreover, to indicate the unsustainable path on which MicroStrategy finds itself, one need only compare its movement to that of the S&P 500 from the previous year. Over the past 12 months, the MSTR has fallen more than 60%, compared to the S&P 500 which was relatively unchanged at the end of the 12 months, falling only 1.1%.

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Evaluation

The various metrics related to valuation strengthen the selling position that I believe is associated with MSTR, especially relative to mid-sized software companies.

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Created by author using Finviz data

As can be seen in the data visualizations above, it is evident that MSTR holds a P/E ratio close to half of the industry average, which is a positive metric associated with the stock. However, this figure is significantly impacted by MicroStrategy’s strategy Bitcoin holdings, whose book value is not a reliable measure, while its market value is in a constant downward spiral. The market value of the business Bitcoin’s holding as of March 31, 2022 was $5.9 billion, which is relatively larger than the company’s market capitalization of $3.55 billion; however, this is on a rapid downward trend with the fall of Bitcoin prices. Likewise, the P/S ratio of 7.01 remains above the industry average of 5.49, which makes the stock relatively inefficient from a financial standpoint, as it generates a lower revenue return per unit price of the stock. Most concerning among these ratios is the stock’s Forward P/E ratio, which is a staggering 75.45, compared to the industry average of 27.91, reflecting a difference of almost 3 factors. This indicates that the stock is significantly overvalued, as its price is well above that of its peers, given its earnings growth forecast.

Risks and conclusion

MSTR is a stock with an uncertain financial outlook. I think that’s largely due to its strategic focus on Bitcoin, which it was unable to support with its trading performance in the software segment. Moreover, the decrease The Bitcoin trend, if it continues to decline at its current rate, could potentially trigger a margin call, which could push the company dangerously to the brink of bankruptcy.

I would be inclined to change my stance on the stock if I saw the company undertake a strategic refocus on its software business segment, and gradually adopt a more cautious approach to its exposure to BTC. Despite the assumptions and philosophy underlying the management’s vision of bitcoin, the company needs to strike a careful balance where the profitability of its software segment can be leveraged to enhance its BTC holdings. In the meantime, however, that’s far from the case, which leads me to classify MSTR as a sale.

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