The veteran software company executed a stock split after its stock price soared.
Experienced software company MicroStrategy (MSTR 0.08%)joined several leading companies, such as Nvidiain executing a forward stock split this year. The company’s 10-for-1 split occurred in August.
MicroStrategy’s decision to execute a stock split came on the heels of a more than 100% rise in share price through 2024. Last October, shares were at a split-adjusted 52-week low of $30.71, but have rallied to $200 this year. Now that the stock split is complete, is now the time to invest in MicroStrategy?
Not necessarily. While the split lowered the price of individual shares, it did nothing to change the company’s overall market value. And to judge whether MicroStrategy is a good investment, some detective work is required to untangle the confusing contradiction between the stock’s rise and its mediocre fundamentals.
Analyzing MicroStrategy’s Stock Success
Despite the stock price increase, MicroStrategy is suffering from a trend of declining revenues. In the first half of 2024, the company’s revenue was $226.7 million, down from $242.3 million in the previous year.
The current consensus among Wall Street analysts adds to the discrepancy between stock price performance and company results. They rate MicroStrategy a Buy with a median price target of $194, indicating a belief in the stock’s upside. This is despite the fact that the company exited the second quarter with a net loss of $102.6 million.
How to explain this mystery? In one word, Bitcoin (CRYPTO: BTC). MicroStrategy began investing in the digital currency in 2020 and as of the end of July had accumulated 226,500 Bitcoin. The company describes itself as the “largest corporate holder of Bitcoin in the world.”
As the cryptocurrency’s value has risen over the past year, so has MicroStrategy stock. In fact, the company’s stock price tracks Bitcoin quite closely.
In short, the stock price increase was driven by the appreciation in the value of the company’s Bitcoin holdings, rather than the business intelligence (BI) software platform the company was founded with in 1989.
MicroStrategy’s software activities
Speaking of its core BI business, what is MicroStrategy doing with it today? It’s integrating artificial intelligence (AI) into its software platform and moving to a subscription-based cloud computing model.
Previously, the company relied on software license sales, but the subscription approach is delivering predictable recurring revenue and is seeing strong customer adoption. For example, subscription revenue was $24.1 million in the second quarter, up 21% from $19.9 million the year before.
While subscription growth is encouraging, CEO Phong Le noted that MicroStrategy’s transition to a software-as-a-service (SaaS) model “may result in a decline in total recognized revenue in the short term, but we expect this to be more than offset by an increase in subscription service revenue in the long term.”
That’s because software license sales recognize the full revenue up front, but with a SaaS model, revenue is recognized over the life of the subscription period. This explains the trend of declining revenues at MicroStrategy. The company expects this transition period to last 12 to 18 months, after which year-over-year revenue growth will begin.
The pros and cons of investing
So far, MicroStrategy’s unconventional approach to buying Bitcoin has paid off for investors. Between the time it started buying Bitcoin in 2020 and the end of July, the company’s stock price has increased by 1,200%. That’s far better than the 64% growth of the S&P 500 index over that period, even outpacing the 948% rise in Nvidia stock.
The management team believes it can put cash on the balance sheet to better use by investing in digital assets, specifically Bitcoin. The idea has value, and as long as the cryptocurrency increases in value over time, this strategy is beneficial to the company.
But it’s not without risk. MicroStrategy’s fortunes are now tied to Bitcoin. This means that whatever affects the digital currency will have a knock-on effect on the company’s stock. For example, changes in regulations regarding Bitcoin could have a substantial impact on MicroStrategy.
Another consideration is how the company pursues its Bitcoin strategy. It finances Bitcoin purchases with the cash generated by its software business, takes on debt, and issues equity. In the long run, MicroStrategy’s goal is to accumulate Bitcoin faster than it can issue equity to generate value for shareholders.
However, the company’s cryptocurrency strategy led to the company accumulating a lot of debt on its balance sheet. At the end of Q2, MicroStrategy’s total liabilities stood at $4.2 billion, of which $3.8 billion was debt. Meanwhile, its total assets stood at $7.1 billion, including $5.7 billion in digital assets, namely Bitcoin, and $66.9 million in cash and equivalents.
This brought MicroStrategy’s debt-to-GDP ratio to 0.55, or 55%, in Q2. That’s up from 0.46 in 2023, when debt was $2.2 billion and total assets were $4.8 billion.
Then there’s the matter of MicroStrategy’s core software business. If the company can’t grow that business, it could struggle to pay its debt, let alone fund more Bitcoin purchases.
So for now, buying MicroStrategy stock is only for investors with a high risk appetite. It would be best to reconsider the company after its software business shows year-over-year revenue growth and its balance sheet strengthens.