(Bloomberg) -- Since the collapse of crypto markets two year ago, MicroStrategy Inc. has outperformed almost every major US stock, including AI bellwether Nvidia Corp.
Fueling the more than 1,700% gain has been co-founder and Chairman Michael Saylor’s unconventional decision four years ago to buy Bitcoin to offset inflation, which has turned the little-known enterprise software maker into the world’s most prominent crypto hedge-fund proxy. With MicroStrategy continuing to make purchases through Bitcoin’s recovery over the past two years, the Tysons Corner, Virginia-based firm has amassed around $18 billion of the tokens, making it the largest publicly traded corporate holder of the cryptocurrency.
Analysts are now beginning to debate whether the more than 200% share price premium over MicroStrategy’s underlying net asset value is too high given that revenue is declining and cash flow constrained. Following the close of trading, the company is expected by analysts to register a third consecutive quarterly loss after taking another impairment charge against the value of its Bitcoin holdings.
“I think that the stock is going to stop skyrocketing,” said Lance Vitanza, managing director of equity research at TD Cowen, who has a “buy” rating on MicroStrategy and expects the price to settle in the $200-to-$215 range.
That hasn’t been the case so far, with MicroStrategy closing at a more than two-decade high of $258.24 on Tuesday as Bitcoin surged toward its all-time record high reached in March. The shares have jumped more than 300% this year, outperforming Bitcoin’s roughly 70% increase, thanks to Saylor’s leveraged investment strategy.
Among US large-cap stocks tracked by Bloomberg, MicroStrategy’s performance was only second to used-car-selling platform Carvana Co., whose shares have appreciated by more than 4,300% after a bankruptcy scare that almost wiped out the stock. Nvidia is up around 870%.
MicroStrategy has turned from using cash flow to issuing convertible notes to buy Bitcoin, and it plans to explore other ways to finance more purchases. Saylor says he essentially borrows money at 1% to buy Bitcoin, which has posted a four-year compounded growth rate of around 50%, according to data compiled by Glassnode.
“We are basically creating leverage by tapping into the convertible bond market,” Saylor said at a Bernstein event this month. “Over time, we’ll explore the fixed income market; we’ll look at issuing preferred shares — things that are, in essence, a swap.”
In 2024, MicroStrategy grew its Bitcoin holdings 18% faster than its fully diluted share count, Vitanza said.
Even so, with around 40 individual Bitcoin purchase announcements over the past four years, the acquisitions have turned quarterly results into a bit of an accounting management exercise. MicroStrategy’s third-quarter impairment charge could exceed $200 million, according to Bloomberg estimates. Whenever MicroStrategy implements a new accounting rule, and values its crypto assets at market value at the end of each reporting period, that could trigger a major cash tax obligation.
On the other hand, the new accounting expected to be introduced next year could make money-losing MicroStrategy a profitable company. Bitcoin assets are listed on the firm’s books at just under $6 billion entering this quarter - less than a third of today’s market value — will be written up to market prices, much of which will result in income for MicroStrategy.
The firm is expected to report net income of $2 billion next year, compared with a loss of about $200 million this year, according to analyst estimates compiled by Bloomberg.
“The company will be in a position pretty much overnight to flip from negative earnings to positive earnings,” said Mark Palmer, managing director at Benchmark Co., who has a “buy” rating on MicroStrategy. “Not only will the optics be better, but the company could be part of various indexes that take into account positive income.”
--With assistance from Tom Contiliano.
©2024 Bloomberg L.P.