MicroStrategy Incorporated (MSTR +0.42%) started as a software company in 1989. Today, it's better known for its devotion to Bitcoin. It prides itself on being the world's first and largest Bitcoin Treasury Company (BTC). The stock has been staggeringly successful in recent years, soaring over 700% over the past three years, including over 350% in just the past 12 months.
The company's Bitcoin focus has made it a simple way for investors to not only indirectly invest in Bitcoin via the stock but to invest in Bitcoin-related opportunities in hopes that the flagship cryptocurrency becomes more tightly woven into the digital economy.
Unfortunately, I worry MicroStrategy's stock will likely decline significantly over the next year due to a disconnect between the share price and business fundamentals.
NASDAQ: MSTR
Key Data Points
How much of MicroStrategy's value comes from software?
At the time of this writing, MicroStrategy's market cap is approximately $82 billion. Since the company has a software business besides its Bitcoin assets, investors need to strip that out before proceeding further.
MicroStrategy sells business intelligence software that uses artificial intelligence (AI) and data analytics to glean trends and support decision making in retail, financial services, healthcare, and government enterprises. It could be considered a competitor to Palantir Technologies or C3.ai. However, the software business is relatively small.
The software business generated $463.5 million in total revenue in 2024, but MicroStrategy had $53 million in cash losses in 2024, so it isn't operating profitably. Thus, it's hard to argue for an aggressive valuation. At the very least, it's not worth over 100 times its revenue like Palantir currently trades, which is arguably a bubble. I'd say it's closer to C3.ai, which trades at only 11 times revenue despite growing over 28% last quarter. MicroStrategy's software sales declined 7% in 2024.
Valuing MicroStrategy's software business at 10 times its sales would equate to (rounding up) $5 billion of its $86 billion market cap.
MicroStrategy's Bitcoin holdings are valued too high
Now, investors can see how much they pay for MicroStrategy's Bitcoin when they buy stock.
According to data tracked by Bitbo, MicroStrategy currently owns 478,740 Bitcoins. Multiplying that by a Bitcoin market price of $100,000, MicroStrategy's Bitcoin holdings are valued at just under $48 billion today. In other words, MicroStrategy's stock reflects a significant premium (about $33 billion) in its Bitcoin versus what it trades for on the market.
The key question is -- why? For example, Grayscale Bitcoin Trust, a spot-Bitcoin ETF that accumulates Bitcoin, trades virtually on par with the value of its underlying Bitcoin.
MicroStrategy discussed plans to use its Bitcoin holdings as capital in an increasingly digital economy. However, that's more like a long-term goal since no current business operations use Bitcoin other than issuing stock and convertible debt to fund more Bitcoin purchases.
Prediction: The stock will be lower in 12 months
Cryptocurrency prices have notoriously experienced boom-and-bust cycles over the years. The recent uptick in meme coins and speculative behavior isn't a scientific indicator but a smoke signal warning the current cycle may be approaching its peak. If prices plunge, it's hard to envision that approximate $33 billion premium holding up.
That premium is almost 40% of the stock's current value. Additionally, a decline in Bitcoin prices would devalue MicroStrategy's underlying assets, worsening an already potentially massive stock decline. Like trading stocks on margin loans, the moves (gains and losses) are sharper in both directions.
Please don't confuse me with a Bitcoin skeptic. Bitcoin is an anti-inflationary asset that has proven, sustained value, and its real-world utility could improve over the coming decade and beyond. This is about valuations and leverage. It's been a fun ride on the way up, but MicroStrategy's ascension seems destined to end. Investors should keep this in mind when deciding how to proceed.
