MSTR

Is It Too Late to Buy MicroStrategy Stock?

No public company has gone all-in on Bitcoin (CRYPTO: BTC) quite like MicroStrategy (NASDAQ: MSTR), which has purchased 193,000 bitcoins since 2020. As a result, the enterprise software company's stock is up over 900%, despite its core business stagnating.

Are you a prospective investor who has a fear of missing out? Below, I'll examine why MicroStrategy is hoarding Bitcoin, how it's funding it, what could go wrong, and where the stock could go from here.

What does MicroStrategy do?

MicroStrategy has a relatively long history as a business-to-business enterprise software company and went public in 1998 before the dot-com bubble. The company even founded Alarm.com in 2000 before later selling it to a venture capital firm in 2009.

Up until 2020, MicroStrategy was singularly focused on growing its core business. But with some cash on hand and slow revenue growth, now-Executive Chairman Michael Saylor decided to purchase $250 million of Bitcoin, becoming the first publicly traded company to do so.

Saylor described Bitcoin and the investment as a "dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash."

Since then, the company's revenue has stagnated. It generated $496 million in 2023, down almost 1% from $499 million in 2023. However, Saylor and MicroStrategy have doubled and tripled down on investing in Bitcoin. As of this writing, the company holds 193,000 Bitcoin at a total cost of $6.09 billion, or $31,168 per Bitcoin.

The cryptocurrency's current price is roughly $67,000. If the company were to cash out, it would have more than doubled its investment.

How does MicroStrategy pay for its Bitcoin?

As mentioned above, the company's core software business had stalled, so it reinvested $726 million through 2023 into Bitcoin. Therefore, most of its Bitcoin transactions were funded through debt and equity.

First, the company's debt has exploded from approximately $531 million in net cash to $2.1 billion in net debt since its spending spree began. While MicroStrategy could easily sell its Bitcoin investment today and cover that debt, Saylor has repeatedly said he will never sell the company's cryptocurrency. When you combine that statement with the fact that the company generated $11 million and $1 million in operating income in 2022 and 2023, respectively, the company's debt is unlikely to decrease anytime soon.

Additionally, MicroStrategy has been aggressively selling its shares on private markets to gain access to capital. As a result, the company's outstanding shares have exploded from 9.7 million in August 2020 to 17 million today, diluting the shares by 83%. As a result, existing shareholders' ownership stakes in the company have decreased as more shares became available.

MSTR Net Financial Debt (Quarterly) Chart

MSTR Net Financial Debt (Quarterly) data by YCharts.

What could go wrong for MicroStrategy?

It's rather simple as to what could go wrong for the company: Bitcoin's price could crash. If the crypto price craters, MicroStrategy's stock will follow, and worse yet, the company could face a margin call.

Essentially, its creditors would ask the company to deposit more funds to continue to service its debt, which Bitcoin backs. In theory, if Bitcoin's price fell low enough, MicroStrategy wouldn't be able to cover the margin call and could face bankruptcy -- even if it sells its holdings.

Previously in 2022, when the company claimed to have 115,000 Bitcoin "unencumbered" by loans, Saylor acknowledged that if the price fell below $3,562, then MicroStrategy would run out of Bitcoin to use as collateral. As of Dec. 31, 2023, the company claimed 173,069 of its 189,150 Bitcoin were "unencumbered" by loans.

In other words, MicroStrategy should be able to sustain a downturn in Bitcoin price, with the threat of a margin call only occurring if the cryptocurrency bottoms out. As the company continues to leverage itself with debt, the price at which it would face a margin call is likely to rise.

MicroStrategy will likely continue to buy Bitcoin

The company's Bitcoin spending spree doesn't look like it will end anytime soon. This week, it announced a private offering for $600 million in convertible senior notes maturing in 2030, which the company will use to buy more Bitcoin.

Senior convertible notes are a type of financial instrument that represents debt and holds the potential to be transformed into ownership shares at a future point in time. The notes are set to reach maturity on March 15, 2030 unless they're repurchased, redeemed, or converted earlier, as per the conditions outlined in their terms.

Put differently, the issuer will likely elect to receive $600 million in cash if MicroStrategy's stock goes down, which will increase the company's debt. Or it may convert the notes into shares at a lower price if the stock goes up, diluting the share count. It could also elect to do a combination of both. In the meantime, the company will pay interest on the debt semi-annually at an interest rate yet to be determined.

Is MicroStrategy stock a buy?

The company has been one of the best-performing stocks in 2024, with its share price increasing over 600% year to date. While it has generally tracked Bitcoin's return until recently, its leverage is starting to make it perform similarly to a leveraged exchange-traded fund (ETF), which amplifies returns (and losses).

Additionally, MicroStrategy's market capitalization of $22 billion is significantly higher than its Bitcoin holdings, which were worth roughly $13 billion at the time of this writing.

MSTR Total Return Level Chart

MSTR Total Return Level data by YCharts.

There's no doubt the company's bold Bitcoin strategy has paid off so far, but that doesn't necessarily mean it will continue. Its increasing leverage and share-count dilution are concerns that may keep traditional investors up at night. Investors interested in Bitcoin can opt for reduced risk by either purchasing the cryptocurrency directly or investing through one of the newly approved Bitcoin ETFs.

Should you invest $1,000 in MicroStrategy right now?

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Collin Brantmeyer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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