Veteran software firm MicroStrategy (MSTR +3.98%)joined several high-profile corporations, such as Nvidia, in executing a forward stock split this year. The company's 10-for-1 split occurred in August.
MicroStrategy's decision to perform a stock split came on the heels of its share price skyrocketing over 100% in 2024. In fact, last October, shares were at a split-adjusted 52-week low of $30.71, but they zoomed as high as $200 this year. With its stock split completed, is now the time to invest in MicroStrategy?
Not necessarily. While the split lowered the price of individual shares, it didn't change the company's overall market value. And assessing whether MicroStrategy is a good investment requires some investigative work to unravel the confusing contradiction between its share-price ascent and its mediocre business fundamentals.
NASDAQ: MSTR
Key Data Points
Dissecting MicroStrategy's stock success
Despite the surge in share price, MicroStrategy suffers from a trend of declining revenue. Through the first half of 2024, the firm's sales were $226.7 million, down from $242.3 million in the previous year.
Adding to the contradiction between its share price performance and business results is the current consensus among Wall Street analysts. They rate MicroStrategy a buy with a median share-price target of $194, which suggests a belief in upside for the stock. This is in spite of the company exiting the second quarter with a net loss of $102.6 million.
How to explain this mystery? In a word, Bitcoin (BTC 0.29%). MicroStrategy began investing in the digital currency in 2020, and through the end of July, it amassed 226,500 Bitcoin. The firm describes itself as the "largest corporate holder of Bitcoin in the world."
As the value of the cryptocurrency has risen over the past year, so has MicroStrategy stock. In fact, the company's share price follows Bitcoin pretty closely.
Data by YCharts.
In short, the appreciation in the company's Bitcoin holdings, rather than the business intelligence (BI) software platform that launched the firm in 1989, accounted for its share-price growth.
MicroStrategy's software business
Speaking of its core BI business, what is MicroStrategy doing with it these days? It's integrating artificial intelligence (AI) into its software platform and transitioning to a subscription-based cloud computing model.
Previously, the company relied on selling software licenses, but the subscription approach provides predictable recurring revenue, and it's seeing strong customer adoption. For instance, its Q2 subscription income was $24.1 million, a 21% increase over the prior year's $19.9 million.
While the subscription growth is encouraging, CEO Phong Le noted MicroStrategy's transition to a software-as-a-service (SaaS) model "may result in a decrease in total recognized revenue in the short term, but in the long run, we expect it to be more than offset by increases in subscription services revenue."
That's because software license sales recognize the full income upfront, but with a SaaS model, revenue is recognized over the life of the subscription term. This explains MicroStrategy's trend of declining revenue. The company expects this transition period to last 12 to 18 months, after which year-over-year revenue growth will start.
The pros and cons of investing
So far, MicroStrategy's unconventional approach of purchasing Bitcoin has paid off for investors. Between the time when it began buying Bitcoin in 2020 to the end of July, the company's stock price has risen 1,200%. That's far superior to the 64% growth of the S&P 500 index over that time, and even better than Nvidia stock's 948% increase.
The management team believes it can put cash on the balance sheet to better use by investing in digital capital, specifically Bitcoin. The idea has merit, and as long as the cryptocurrency increases in value over time, this strategy benefits the company.
But it's not without risk. MicroStrategy's fortunes are now coupled with Bitcoin. This means that what affects the digital currency will have a ripple effect on the firm's stock. For example, regulatory changes involving Bitcoin could have a substantial impact on MicroStrategy.
Another consideration is how the company is pursuing its Bitcoin strategy. It's funding Bitcoin purchases from the cash generated by its software business, taking on debt, and issuing stock. Over the long term, MicroStrategy's goal is to accumulate Bitcoin faster than it issues shares to generate value for shareholders.
However, its cryptocurrency strategy led to the firm accruing a lot of debt on its balance sheet. At the end of Q2, MicroStrategy's total liabilities were $4.2 billion, $3.8 billion of that in debt. Meanwhile, total assets were $7.1 billion, including $5.7 billion in digital assets, namely Bitcoin, and $66.9 million in cash and equivalents.
This brought MicroStrategy's Q2 debt ratio to 0.55, or 55%. That's an increase from 2023's 0.46, when debt was $2.2 billion and total assets were $4.8 billion.
In addition, there's the matter of MicroStrategy's core software business. If it fails to grow this business, the company could end up struggling to pay its debt, let alone fund more Bitcoin purchases.
So for now, buying MicroStrategy stock is only for investors with a high risk tolerance. It's best to reconsider the company after its software business shows year-over-year revenue growth and its balance sheet strengthens.
