Amid the recent cryptocurrency crash that saw Bitcoin dip under the $30,000 mark for the first time since January, MicroStrategy’s [MSTR] share price has slumped. Will the company’s big bet on Bitcoin pay off in the long run?
MicroStrategy’s share price is up 72.2% year-to-date at $668.99 on 29 June, and up 464.5% in the past 52 weeks. The stock appears to have recovered from a tumble of around 15% between 18 June and 25 June amid the cryptocurrency market sell-off.
However, as of 29 June, MicroStrategy’s share price is down 49.1% from its intraday high of $1,315, which it peaked at on 9 February.
MicroStrategy’s YTD share price rise
Although a software company, MicroStrategy’s share price has fluctuated wildly due to the large volume of Bitcoin on its balance sheet. On 21 June, the company announced it had purchased 13,005 Bitcoins for roughly $489m at an average price of approximately $37,617 per Bitcoin. This took the total number of Bitcoin held to 105,085 Bitcoin for a purchase price of around $2.741bn.
Following news of its most recent purchase, MicroStrategy’s share price dropped nearly 10% on the day of the announcement. The price of Bitcoin has also fluctuated in recent days, alongside MicroStrategy’s share price.
Is Bitcoin the future for property?
In a recent interview with Bloomberg’s Emily Chang, Michael Saylor, CEO and co-founder of MicroStrategy, was asked whether the current volatility in the price of Bitcoin was a dip or something more prolonged.
Saylor explained that Bitcoin was a long-term technology play for the company and, to this end, short-term price fluctuations don’t matter so much. He envisages a future where billions of people own property rights through their smartphones and where Bitcoin will be the primary blockchain that enables the transaction of property. The road to get to that point will be volatile, he conceded.
“Bitcoin is the dematerialisation of property. We’re sucking the value out of gold and real estate – we’re putting it on a blockchain [and] we’re giving it to the people. It’s a long-term trend. It’s a million times more efficient than hauling your property around on your back,” Saylor told Chang.
“Bitcoin is the dematerialisation of property. We’re sucking the value out of gold and real estate – we’re putting it on a blockchain [and] we’re giving it to the people. It’s a long-term trend. It’s a million times more efficient than hauling your property around on your back” - Michael Saylor, CEO and co-founder of MicroStrategy
He also stressed that all the Bitcoin had been acquired through a combination of equity and debt – either unsecured convertible bonds that run for five or six years or secured debt against the cashflow of the software business.
In a note to clients seen by TipRanks, Kamil Mielczarek, an analyst at William Blair, said: “Even if Bitcoin were to fail, MicroStrategy is sufficiently profitable to cover annual interest payments. MicroStrategy’s core business has the potential to generate $100m annually in free cash flow for the near term.
“In the 12 months ending 31 March 2021, the company degenerated $106m in free cashflow and $84m in non-GAAP operating income. We expect the company to expand margins and grow revenue over the next 12 months.”
“Even if Bitcoin were to fail, MicroStrategy is sufficiently profitable to cover annual interest payments. MicroStrategy’s core business has the potential to generate $100m annually in free cash flow for the near term” - Kamil Mielczarek, analyst at William Blair
Given the recent pull-back in MicroStrategy’s share price, its current level could be an attractive set-up for those looking to make a play on cryptocurrency.
Back in April, when MicroStrategy’s share price was higher than it is now, Joseph Vafi, an analyst at Canaccord Genuity, gave MicroStrategy’s share price a target of $920.
In a note to clients seen by Barron’s, Vafi argued: “From here, we believe the primary drivers for MicroStrategy shares in descending order will be the spot price of Bitcoin, investor sentiment around the digital asset, market bet and performance in the core business.”
Vafi added that buying into MicroStrategy depends on individual conviction that the price of Bitcoin will continue to push higher and that this will send the stock price higher as well.
“The core business at MicroStrategy represents a solid investment in enterprise software with its own catalysts at play. But at this point, MicroStrategy’s Bitcoin holdings represent the majority of enterprise value and, in our view, this is also the growthier side of the investment case” - Joseph Vafi, analyst at Canaccord Genuity
“The core business at MicroStrategy represents a solid investment in enterprise software with its own catalysts at play,” he wrote. “But at this point, MicroStrategy’s Bitcoin holdings represent the majority of enterprise value and, in our view, this is also the growthier side of the investment case.”
Given the current volatility in cryptocurrency prices, a less risky play on the theme could be to invest in a blockchain ETF. Amplify Transformational Data Sharing [BLOK] had MicroStrategy and crypto miners Galaxy Digital [GLXY], Marathon Digital Holdings [MARA] and Argo Blockchain [ARGO.L] in its top 15 holdings as of 30 June. The ETF had a year-to-date daily total return of 30.12% on 29 June.
Software-focused ETFs that hold MicroStrategy haven’t performed as well. The First Trust Cloud Computing ETF [SKYY] and Invesco S&P SmallCap Information Technology ETF [PSCT] had year-to-date daily total returns of 11.66% and 16.36%, respectively, on 29 June.