Bitcoin Betting: Risks and Opportunities Behind MicroStrategy's Soaring Stock

Bitcoin Betting: Risks and Opportunities Behind MicroStrategy's Soaring StockAs the largest "Bitcoin proxy" in the US stock market, MicroStrategy's core business has been lackluster, but its stock price is deeply linked to Bitcoin, soaring higher than even the tech giant Nvidia over the past two years. However, analysts are divided on future prospects

Bitcoin Betting: Risks and Opportunities Behind MicroStrategy's Soaring Stock

As the largest "Bitcoin proxy" in the US stock market, MicroStrategy's core business has been lackluster, but its stock price is deeply linked to Bitcoin, soaring higher than even the tech giant Nvidia over the past two years. However, analysts are divided on future prospects.

On October 30th, MicroStrategy released its latest financial report, showing that its software business revenue fell by 10% to $116.1 million, below analysts' estimates of $122.5 million. The net loss reached $340 million, marking its third consecutive quarterly loss and significantly widening from the $140 million loss in the same period last year. The loss was primarily attributed to a $412 million impairment charge on its Bitcoin holdings, which currently amount to approximately $18 billion.

Despite the dismal performance, MicroStrategy's stock price has been among the strongest in the US stock market. In 2022, MicroStrategy's share price has skyrocketed by 1700%, while Nvidia has only gained about 870% in the same period. Among large US stocks, MicroStrategy's performance is second only to used car sales platform CarvanaCo., whose shares have soared over 4300% after a decline in bankruptcy fears. MicroStrategy's rise even outpaces Bitcoin. This year, MicroStrategy's stock price once rose by 300%, exceeding Bitcoin's approximately 70% gain. This is largely due to the leveraged investment strategy of its co-founder and chairman, Michael Saylor: borrowing funds to buy Bitcoin at an interest rate of about 1% through instruments like convertible notes, while Bitcoin has delivered a compound annual growth rate of about 50% over the past four years.

With its core business lagging and its Bitcoin sideline proving incredibly profitable, does MicroStrategy have any room left for growth after its explosive surge?

On the one hand, some analysts believe that the current stock price is already significantly overvalued compared to its asset value and anticipate no further rise. Lance Vitanza, director of equity research at TDCowen, believes that MicroStrategy's stock price will stop surging, considering its declining revenue and constrained cash flow. Vitanza holds a "buy" rating on MicroStrategy and expects the price to stabilize between $200 and $215.

On the other hand, some analysts believe that new accounting standards next year, which would require the company to value its Bitcoin holdings at market prices, will turn around MicroStrategy's losses, making its shares still worthy of a "buy." Currently, the Bitcoin assets on MicroStrategy's books are only worth $6 billion, less than a third of its current market value. If these Bitcoins were re-evaluated at market value, it would bring a massive influx of revenue to MicroStrategy. According to analysts polled by Bloomberg, the new accounting rules will bring MicroStrategy approximately $2 billion in net profit next year, a stark contrast to its estimated $20 million loss this year.

Mark Palmer, managing director at BenchmarkCo., says: "The company will virtually overnight go from negative earnings to positive earnings, not only will its image be better, but the company may be included in some indexes that require positive earnings." Palmer holds a "buy" rating on MicroStrategy.

MicroStrategy's rise is closely tied to the strategy of its founder, Michael Saylor. In August 2020, in the wake of the pandemic, MicroStrategy decided to start investing in Bitcoin as a hedge against inflation, a decision that transformed the little-known enterprise software maker into the world's most well-known "Bitcoin proxy." Over the past four years, MicroStrategy has issued about 40 announcements of Bitcoin purchases, accumulating approximately $18 billion worth of Bitcoin, making it the largest holder of Bitcoin among publicly listed companies in the US.

MicroStrategy started buying with cash flow, then levered up by raising funds through instruments like convertible notes, and plans to explore other financing methods to acquire even more Bitcoin. Saylor said this month at a public event: "We're basically creating leverage through the use of the convertible bond market Over time, as we move into the fixed income market, we'll consider issuing preferred stock - essentially a swap."

MicroStrategy has announced plans to buy Bitcoin in the years to come. After releasing its loss report overnight, MicroStrategy announced plans to raise $42 billion over the next three years, including $21 billion in equity and $21 billion in fixed income securities, to buy more Bitcoin. President and CEO Phong Le said in a statement: "Our focus remains on increasing shareholder value creation through our digital transformation of capital As a Bitcoin treasury company, we intend to use the additional capital to purchase more Bitcoin as a financial reserve asset."

Market expectations for MicroStrategy's future are split. On the one hand, the company's continuous leveraged Bitcoin buying strategy carries risks, especially when Bitcoin experiences a significant price decline, leading to substantial financial pressure on the company. On the other hand, the potential benefits brought about by the new accounting standards are also worth watching, but the implementation of these standards also carries uncertainty.

Overall, MicroStrategy's investment strategy is highly controversial, and the future trajectory of its stock price will depend on the direction of Bitcoin prices and the company's future operational strategies. Investors need to carefully assess the risks and opportunities and make rational investment decisions.