Investors need to exercise heightened caution when considering MicroStrategy's stock, given its staggering $42 billion investment.
Investors need to exercise heightened caution when considering MicroStrategy's stock, given its staggering $42 billion investment.
MicroStrategy (MSTR -9.52%) being a significant crypto supporter is an understatement. The corporation has substantially invested in Bitcoin (BTC -5.37%) and has continued to augment its position in recent quarters. Currently, MicroStrategy holds the most substantial corporate stake in the digital currency. Yet, it seems unsatisfied with its current position.
Recently, MicroStrategy declared its intention to supplement its crypto portfolio further. Although this could be an excellent business move, considering Bitcoin's recent surge, it also amplifies the investment risk.
MicroStrategy sets target to acquire additional $42 billion worth of Bitcoin
Typically, a company revealing capital infusion plans revolves around expansion strategies or entry into new markets. However, MicroStrategy, an enterprise analytics software provider, intends to raise an astounding $42 billion, not for business expansion, but to increase its Bitcoin holdings.
Half of this capital will be secured through fixed-income securities, and the remaining half will be sourced from equity. The company estimates it will require approximately three years to gather all the funds. As of November 11, MicroStrategy had amassed over 279,000 Bitcoins, a significant increase from the 189,000 it held at the beginning of the year.
Risks associated with this strategy and the stock
As Bitcoin's value has escalated and reached unprecedented highs, MicroStrategy's stock value has also experienced a considerable boost. Although Bitcoin and MicroStrategy's shares have shown a positive correlation in the past, this year, MicroStrategy's stock has surged significantly.
However, the concern for investors is that securing capital to invest in digital assets like Bitcoin can be a highly risky move. Should Bitcoin encounter a downturn or a value drop, investors might swiftly lose faith in MicroStrategy. In 2022, when Bitcoin fell by 65%, MicroStrategy's stock plummeted by 74%.
Currently, MicroStrategy appears more like a Bitcoin holding company than a software provider. Although it still generates revenue from its enterprise software, its sales declined by over 10% in the latest period, which concluded on September 30. The company's primary focus now seems to be enhancing its Bitcoin holdings instead of focusing on expanding its core operations.
If investors are primarily purchasing the stock due to its crypto strategy, they should be aware that MicroStrategy is deeply affected by Bitcoin's fluctuating value. Moreover, by holding a substantial amount of digital assets, its earnings have significantly wavered due to digital asset gains and losses. In the last quarter, the company incurred a net loss of $340 million – more than twice its revenue ($116 million) – primarily due to digital asset impairment losses totaling $412 million.
Consider buying Bitcoin directly instead of MicroStrategy shares
If you're optimistic about Bitcoin, investing directly in the digital asset or exchange-traded funds might be more beneficial than purchasing MicroStrategy shares.
Even MicroStrategy's valuation suggests it trades more like a digital coin than a regular stock – its forward price-to-earnings ratio surpasses 1,200%. However, this valuation is based on analyst projections, and given MicroStrategy's volatile earnings, profitability is far from a certainty. Despite revenue, the stock's valuation is inordinate – it's trading at over 145 times trailing-12-month sales.
MicroStrategy's latest move, to raise capital to invest in more Bitcoin, is an extremely risky one that doesn't enhance its fundamentals. It will only increase MicroStrategy's risky and speculative nature.
Given MicroStrategy's plan to acquire additional $42 billion worth of Bitcoin, this significant investment in the digital currency further solidifies its position in the finance world, leveraging money to bolster its crypto portfolio.
However, this strategy shifts the focus from MicroStrategy's core operations as a software provider to its Bitcoin holdings, potentially impacting its financial stability if Bitcoin's value experiences a downturn.