Is MicroStrategy a buy? | The Pied Fool

MicroStrategy (MSTR 1.74%) began to acquire Bitcoin (BTC 3.77%) four years ago and since then, its stock has outperformed every company in the S&P 500 except Nvidia with an impressive 863% return. The company’s Bitcoin holdings have grown to 226,500 coins, currently valued at $13.1 billion, leading to a recent 10-for-1 stock split.

Now that the dust has settled on the stock split, let’s explore how and why MicroStrategy is accumulating Bitcoin and its future prospects to see if MicroStrategy stock is a buy, sell, or hold.

Why did MicroStrategy start buying Bitcoin?

Until 2020, MicroStrategy focused primarily on its core business as a business-to-business software provider. However, faced with slow revenue growth and excess cash, Michael Saylor, former CEO and now executive chairman, decided to invest $250 million of the company’s cash in Bitcoin, making MicroStrategy the first publicly traded company to do so thing.

In 2020, Saylor saw Bitcoin as a “trusted store of value and an attractive investment asset with more potential for long-term appreciation than holding cash.”

The decision paid off for MicroStrategy as the company purchased 226,500 Bitcoins at an average price of $36,821 and the current Bitcoin price is around $58,000. Expanding on the math, if MicroStrategy liquidated its entire Bitcoin holding, it would result in a profit of approximately $4.8 billion.

Here are the risks of MicroStrategy’s Bitcoin bet

While MicroStrategy’s bet has worked so far, that doesn’t mean it will continue to pay off for investors. Namely, the company funded additional acquisitions with debt and equity after MicroStrategy’s initial Bitcoin purchase with cash on hand. As a result, the company’s cash reserves fell sharply and its shares outstanding rose significantly.

On its balance sheet, MicroStrategy had about $531 million in net cash before its Bitcoin expense, which worsened to $3.8 billion in net debt as of Q2 2024. Despite having the option to to sell his Bitcoin and clear the debt, Saylor did. it is clear that the company will not part with its cryptocurrency. Given this position and the fact that the company generated just $5.2 million in cash from operations for the first half of 2024, the company will likely continue to find creative ways to raise capital.

Recently, MicroStrategy used convertible notes — loans that allow the note holder to convert their loan into an equity stake in the company — to finance Bitcoin purchases. As a result, MicroStrategy’s shares outstanding have risen 110% over the past four years. In other words, if you were a MicroStrategy shareholder four years ago, your ownership stake has been cut in half.

MicroStrategy currently has five different convertible notes with exercise dates between 2025 and 2032, which could dilute an additional 18.2 million shares outstanding to the current total of 194.3 million.

Net Financial Debt MSTR Data (Quarterly) by YCharts

While the stock dilution frustrates shareholders, the more significant risk for MicroStrategy is whether the price of Bitcoin craters. In this scenario, the good news is that MicroStrategy claimed that 175,721 of its bitcoins, or 78%, were “unencumbered” by its loans as of June 30, 2024.

The bad news is the company’s reliance on convertible notes. In the scenario of a Bitcoin crash, the lender may not be interested in converting the debt into MicroStrategy stock, and the company will be forced to repay the loan in cash. Without the support of a strong Bitcoin price, MicroStrategy’s debt could snowball quickly.

Is MicroStrategy a buy, hold or sell?

The leveraged nature of MicroStrategy makes for an incredibly high-risk, high-reward stock. Unsurprisingly, the stock functions more like a leveraged exchange-traded fund than the price of Bitcoin, as its stock amplifies Bitcoin’s gains and losses. This happened in 2024, with MicroStrategy delivering a 111% price appreciation compared to Bitcoin’s 37% return.

While MicroStrategy presents an attractive opportunity, there is one simple reason why even the most enthusiastic Bitcoin investors should stay away: its market cap is significantly larger than its Bitcoin holdings. As of this writing, MicroStrategy trades at a market cap of $25.3 billion, with Bitcoin worth just $13.1 billion. And while the company is likely to acquire more Bitcoin in the future, it will come at the price of further shareholder dilution, given that its core business is unlikely to deliver significant earnings.

Alternatively, investors looking to gain exposure to Bitcoin should consider buying the cryptocurrency directly or through one of the recently approved Bitcoin ETFs.