MicroStrategy (MSTR) has been a standout performer on Wall Street, but according to a recent analysis by Andrew Bary in Barron’s, as reported by BI, this might not be a reason to jump on the bandwagon. The company’s $88.75B market value currently stands at nearly two and a half times the value of its Bitcoin holdings when adjusted for $7 billion in debt and an estimated $1 billion valuation of its software business. This significant gap raises questions about the sustainability of MSTR’s stock valuation.
MicroStrategy has adopted a strategy that breaks from traditional Wall Street norms by aggressively buying Bitcoin (BTC-USD) with funds raised through stock sales and convertible bonds. This approach has propelled the company’s stock to a remarkable 525% increase this year, reaching $473 per share, thanks largely to a massive following among retail investors. However, this premium over its Bitcoin assets suggests an overheated valuation, making the stock potentially vulnerable to correction, the author notes.
The reliance on Bitcoin’s price performance is a double-edged sword for MicroStrategy. The cryptocurrency has seen a significant post-election surge of 45%, reaching an all-time high of $103,900.47 on Dec. 4. Yet, this also means that any downturn in Bitcoin’s value could lead to a sharp correction in MSTR’s stock price. The speculative nature of Bitcoin, coupled with MicroStrategy’s leveraged position, creates a scenario where the stock could face substantial volatility or even a significant pullback.
Moreover, the strategy of continuously raising capital to buy more Bitcoin involves considerable risk. It could lead to dilution of existing shares and increase the company’s debt load, aspects that traditional investors might find concerning. While the strategy has paid off in a bull market for Bitcoin, it leaves MicroStrategy susceptible to market downturns, regulatory changes, or shifts in investor sentiment towards cryptocurrencies.
Given these factors, the recommendation from Bary’s analysis advises caution. The stock’s current valuation might not be justified by its underlying assets when considering the volatility and speculative nature of Bitcoin. Investors, particularly those new to the market or chasing the recent gains, should be wary. The allure of MicroStrategy’s past performance might be overshadowing the potential risks, suggesting that now might not be the best time to invest in MSTR if one is seeking stability or looking to avoid the speculative nature of cryptocurrencies.
Price Action: MSTR is trading 1.91% lower at $387.45, while BTC is down 1.46% at $98,693.44 at press time.
Disclaimer: The information provided is for informational purposes only and does not constitute financial, investment, or trading advice. Trading stocks/crypto involves significant risk, and past performance is not indicative of future results. Always conduct your own research and consult with a qualified financial advisor before making any investment decisions.
Leave a Reply