Main Business Lags, Bitcoin "Side Hustle" Soars: MicroStrategy's Crazy Gamble

Main Business Lags, Bitcoin "Side Hustle" Soars: MicroStrategy's Crazy GambleDespite its core business performing flat, MicroStrategy, as the largest "Bitcoin proxy" on the US stock market, has seen its stock price deeply tied to Bitcoin, even exceeding the gains of tech giant Nvidia over the past two years. This unusual phenomenon of a "struggling main business, booming side hustle" has drawn widespread attention

Main Business Lags, Bitcoin "Side Hustle" Soars: MicroStrategy's Crazy Gamble

Despite its core business performing flat, MicroStrategy, as the largest "Bitcoin proxy" on the US stock market, has seen its stock price deeply tied to Bitcoin, even exceeding the gains of tech giant Nvidia over the past two years. This unusual phenomenon of a "struggling main business, booming side hustle" has drawn widespread attention. However, with MicroStrategy revealing its latest financial report, its future prospects are facing new challenges.

Diminished Earnings: Huge Losses Coupled with Impairment Charges

On October 30th, MicroStrategy released its latest financial report, revealing a 10% decline in software revenue to $116.1 million, falling short of analysts' expectations of $1.225 million. Net losses reached $340 million, marking the third consecutive quarter of losses and a significant expansion from the $140 million loss during the same period last year.

The primary cause of these losses lies in the company's $412 million impairment charge on its approximately $18 billion Bitcoin inventory. This action reflects the company's cautious stance on the future trajectory of Bitcoin prices and highlights the weakness of its core business.

Increased Investment: Plans to Raise $42 Billion Over Three Years to Continue Bitcoin Purchases

Despite its subpar performance, MicroStrategy hasn't hesitated to double down on Bitcoin. The company announced its intention to raise $42 billion over the next three years, including $21 billion in equity and $21 billion in fixed-income securities, to acquire more Bitcoin.

Phong Le, the company's president and CEO, stated: "Our focus remains on maximizing value creation for shareholders by leveraging the digital transformation of capital... As a Bitcoin Treasury company, we plan to use the additional capital to purchase more Bitcoin as a financial reserve asset."

Skyrocketing Stock Price: Up 1700% Since 2022, Surpassing Bitcoin Gains

MicroStrategy's stock price has closely mirrored the movements of Bitcoin, even surpassing its gains. Since 2022, MicroStrategy shares have soared 1700%, while Nvidia has only increased by about 870% during the same period. Among major US stocks, MicroStrategy's performance trails only behind used car sales platform CarvanaCo., whose stock value jumped over 4300% after a recessionary panic subsided.

This year, MicroStrategy has climbed as much as 300%, outpacing Bitcoin's approximately 70% gains. This rally is largely attributed to the leveraged investment strategy implemented by Michael Saylor, co-founder and chairman of the company: through methods like convertible notes financing, they borrow funds to purchase Bitcoin at an interest rate of about 1%, while Bitcoin has exhibited a compound annual growth rate of around 50% over the past four years.

Future Outlook: Analysts Disagree, Potential for Upside and Downside Remains Uncertain

Analysts hold differing opinions regarding MicroStrategy's future progression. On one hand, some believe the company's current stock price is already inflated beyond its asset value and won't climb further. Lance Vitanza, director of equity research at TDCowen, suggests that MicroStrategy's share price will plateau, anticipating a stabilization between $200 and $215, considering the decline in revenue and constrained cash flow.

On the other hand, some analysts foresee a turnaround in MicroStrategy's losses due to the implementation of new accounting standards next year, which will value the company's Bitcoin holdings at market prices, making the company's stock still "buyable." Mark Palmer, managing director of BenchmarkCo., states: "They're going to go from a negative earnings company to a positive earnings company almost overnight, not only will the image be better, but they'll probably be included in some of the indexes that require positive earnings."

Leveraged Investment: Utilizing Convertible Bonds for Financing, Increasing Bitcoin Stake

As early as August 2020, following the outbreak of the pandemic, MicroStrategy made the decision to begin investing in Bitcoin as a hedge against inflation, a move that catapulted them into becoming a globally recognized "Bitcoin proxy." Over the past four years, MicroStrategy has issued approximately 40 announcements concerning Bitcoin purchases, amassing a portfolio of Bitcoin valued at around $18 billion, making it the publicly traded company with the largest Bitcoin holdings.

Initially, MicroStrategy utilized its cash flow for purchases, later employing instruments like convertible notes to raise funds and leverage those purchases, and they plan to explore additional financing methods to acquire even more Bitcoin. Earlier this month, Saylor mentioned in a public event: "We've essentially created leverage through the use of the convertible bond market... We'll be exploring the fixed income market over time, we'll be considering issuing preferred stock basically a swap."

Fund Raising: Plans to Raise $42 Billion Over Next Three Years, Continuing Bitcoin Purchases

MicroStrategy has disclosed its purchase plans for the coming years. Following the release of its disappointing earnings report overnight, MicroStrategy declared its intention to raise $42 billion over the next three years to acquire additional Bitcoin.

This fundraising plan will comprise two parts: $21 billion in equity and $21 billion in fixed-income securities. The company indicated it will use this capital to further expand its Bitcoin holdings and solidify Bitcoin as its primary financial reserve asset.

Share Price Valuation: 200% Premium, but Potential Upside from New Accounting Rules

MicroStrategy's current stock price is trading at a premium exceeding 200% relative to its asset value. This exorbitant premium has sparked concerns among some analysts, while others anticipate potential benefits for the company from the implementation of new accounting standards next year.

Presently, Bitcoin assets on MicroStrategy's books are valued at merely $6 billion, representing less than one-third of its current market capitalization. If these Bitcoin holdings were re-evaluated at market value, it would significantly boost MicroStrategy's revenue. According to analyst estimates compiled by Bloomberg, these new accounting rules could generate approximately $2 billion in net profit for MicroStrategy next year, a stark contrast to this year's anticipated loss of around $20 million.

Conclusion: High Risk, High Reward, MicroStrategy's Future Remains Uncertain

MicroStrategy's bold gamble has captured considerable market attention, and its future development is shrouded in uncertainty. The company's core business is underperforming, but its substantial Bitcoin investment has yielded impressive returns.

Going forward, MicroStrategy's trajectory will hinge on the performance of Bitcoin prices, the implementation of new accounting regulations, and the company's ability to successfully raise sufficient funds to continue expanding its Bitcoin holdings.

This is a high-risk, high-reward venture, and the ultimate outcome will be determined by time and market scrutiny.