Three consecutive quarterly losses, stock price rises more than NVIDIA, can "Bitcoin proxy" MSTR continue to soar?

As the largest "Bitcoin proxy" in the US stock market, MicroStrategy's main business performance has been mediocre, but its stock price is deeply tied to Bitcoin, with a growth rate over the past two years that even surpasses that of the high-flying stock Nvidia. However, analysts have differing opinions on the future market.

On October 30th, the latest financial report showed that MicroStrategy's software business revenue fell by 10% to $116.1 million, below analysts' forecast of $122.5 million; the net loss was $340 million, marking the third consecutive quarter of losses, significantly widening from a loss of $140 million in the same period last year.

The main reason for the loss is the company's provision for impairment of approximately $412 million on its Bitcoin inventory valued at about $18 billion. Overnight, MicroStrategy announced plans to raise $42 billion over the next three years to continue buying Bitcoin.

Although the performance looks poor, the stock price is almost the strongest in the US stock market. Since 2022, MicroStrategy's stock price has soared by 1,700%, while Nvidia has only risen about 870% during the same period. Among large US stocks, MicroStrategy's performance is second only to the used car sales platform Carvana Co., which saw its stock price appreciate over 4,300% after bankruptcy fears subsided.

MicroStrategy's increase even outpaced Bitcoin. This year, MicroStrategy's stock rose by 300%, exceeding Bitcoin's approximately 70% increase.

This is mainly attributed to its co-founder and chairman Michael Saylor's leveraged investment strategy: borrowing at an interest rate of about 1% to purchase Bitcoin through convertible note financing, while Bitcoin's compound annual growth rate over the past four years has been about 50%.

With the main business struggling and the Bitcoin side business being "highly profitable," does MicroStrategy still have room for further increases after the surge?

On one hand, some analysts believe that the current stock price is already too high relative to asset value, and they expect it will not rise further. On the other hand, some analysts believe that next year's new accounting standards will value the Bitcoin held by the company at market price, thus reversing MicroStrategy's loss situation, making the company's stock still worth "buying."

Leveraging to buy Bitcoin, continuing for the next three years

In August 2020, shortly after the outbreak of the pandemic, MicroStrategy decided to start investing in Bitcoin to hedge against inflation, a decision that transformed this little-known enterprise software manufacturer into the world's most recognized "Bitcoin proxy."

Over the past four years, MicroStrategy has announced approximately 40 Bitcoin purchases and has accumulated Bitcoin worth about $18 billion, making it the company with the largest Bitcoin holdings among US-listed companies.MicroStrategy initially used cash flow to buy, later leveraging funds through tools such as convertible notes, and plans to explore other financing methods to purchase more Bitcoin.

Saylor stated at a public event this month: “We are essentially creating leverage by utilizing the convertible bond market... Over time, we will explore the fixed income market and consider issuing preferred stock—essentially a type of swap.”

MicroStrategy has announced its purchasing plan for the next few years. After releasing a loss report overnight, MicroStrategy announced plans to raise $42 billion over the next three years, including $21 billion in equity and $21 billion in fixed income securities, to purchase more Bitcoin.

President and CEO Phong Le stated in a statement:

“Our focus remains on increasing shareholder value creation through the digital transformation of capital... As a Bitcoin financial company, we plan to use additional capital to purchase more Bitcoin as a financial reserve asset.”

Stock Price Premium of 200%, but Expected to "Turn Profitable" Next Year

Regarding MicroStrategy's stock price, some analysts have expressed concerns about the extremely high premium, while others anticipate potential benefits from changes in accounting standards next year.

Currently, MicroStrategy's stock price has a premium of over 200% compared to its asset value, and considering the decline in revenue and constrained cash flow, TD Cowen's Director of Equity Research, Lance Vitanza, believes the stock price will stop soaring.

Vitanza holds a "buy" rating on MicroStrategy and expects the price to stabilize between $200 and $215.

On the other hand, new accounting rules introduced next year may turn the loss-making MicroStrategy into a profitable company. Currently, the value of Bitcoin assets on MicroStrategy's books is only $6 billion, less than one-third of its current market value. If these Bitcoins are re-evaluated at market value, it would bring substantial revenue to MicroStrategy.

According to analyst estimates compiled by Bloomberg, the new accounting rules are expected to bring MicroStrategy approximately $2 billion in net profit next year, in stark contrast to this year's loss of about $20 million.

Mark Palmer, Managing Director at Benchmark Co., stated: “The company will almost overnight turn from negative earnings to positive earnings, which will not only improve its image but may also lead to its inclusion in some indices that require positive earnings.” Palmer holds a "buy" rating on MicroStrategy