2022 was a brutal year for stocks as inflation, rising interest rates, and other macro challenges rattled the markets. Many of the stocks that were punished last year bounced back in 2023 as some of those headwinds stabilized, but the market could be due for another pullback in 2024 after the S&P 500 and Nasdaq Composite rose by about 20% and 30%, respectively, over the past 12 months.
If the market plunges again next year, its more speculative stocks could be the first to tumble. One of those is MicroStrategy (MSTR 0.45%), which saw its stock price nearly triple over the past 12 months as the value of its Bitcoin (BTC -1.62%) holdings rose.
What does MicroStrategy do?
MicroStrategy was founded 34 years ago as a data mining and analytics company. It went public in 1998, and its stock soared from its split-adjusted IPO price of $60 to a record high of $3,130 near the apex of the dot-com bubble in early 2000.
But that bubble burst shortly after MicroStrategy’s stock peaked, and the stock’s decline was exacerbated by the unexpected restatement of its financial results for the previous two years. Those sudden revisions prompted the Securities and Exchange Commission to launch a probe into the company that eventually ended in a settlement.
Over the two decades that followed, MicroStrategy divested itself of some of its businesses and expanded its software into the mobile and cloud markets. However, the aging software company faced fierce competition from higher-growth analytics companies like Salesforce as well as expanding cloud infrastructure giants like Amazon Web Services and Microsoft Azure.
From a software maker to a Bitcoin hoarder
From 2010 to 2020, MicroStrategy’s revenue only grew at a compound annual rate of 0.6%. It also turned unprofitable in 2020. That’s why it might seem odd that its stock surged 172% in 2020.
That rally was completely driven by the company’s abrupt decision to hoard Bitcoin as the cryptocurrency’s price skyrocketed. It initially bought $250 million worth of Bitcoin in August 2020 and continued to purchase more over the following three years.
MicroStrategy’s revenue rose by 6% to $511 million in 2021 as its software business stabilized in a post-pandemic market. However, its net loss widened from $7.5 million in 2020 to $535.5 million in 2021 as its Bitcoin impairment losses surged.
Bitcoin’s price peaked at more than $65,000 in November 2021. But by the end of 2022, its price had dropped to about $16,000 as inflation, rising interest rates, and a marketwide shift away from risk assets crushed the cryptocurrency market. However, MicroStrategy was still holding 132,500 Bitcoin that it had acquired for an aggregate cost of $4 billion and at an average price of $30,100 per Bitcoin.
Meanwhile, MicroStrategy’s core software business stayed sluggish as declining product license and support revenues offset its rising subscription revenue. As a result, its revenue fell by 2% to $499 million in 2022 and its net loss widened to $1.47 billion. Most of that loss was attributed to its $1.29 billion in Bitcoin impairment charges.
Does Bitcoin’s rebound make MicroStrategy a buy?
MicroStrategy seemed to be on the ropes last year, but Bitcoin’s recovery to about $42,000 brought back the bulls. By the end of Q3 2023, the company was holding 158,400 Bitcoin at an average purchase price of $29,586 with a market value of $4.7 billion. That’s half the company’s current enterprise value of $9.4 billion — so if the token resumes its climb, that could certainly drive MicroStrategy’s stock higher.
Its software business is also growing again. Its total revenue rose 1% year over year to $371.8 million in the first nine months of 2023 as its 38% growth in subscription revenue offset the declines in its product license and support revenues. It also generated a net profit of $340 million, compared to a net loss of $1.22 billion a year earlier, and its digital impairment losses declined 93% year over year.
For the full year, analysts expect MicroStrategy’s revenue to rise 1% to $505 million as it generates a net profit of $334 million. But based on those estimates and its current enterprise value, it still doesn’t seem like a bargain at 19 times this year’s sales. Its high debt-to-equity ratio of 3.0 could also limit its potential for further share price gains as long as interest rates stay elevated.
Those weaknesses, along with management’s odd decision to mix a slow-growth software business with a volatile Bitcoin-hoarding one, will likely make the stock an easy target for the bears if the market crashes again. So for now, I’d simply invest in higher-growth tech stocks or buy Bitcoin instead of betting on MicroStrategy’s unbalanced approach to both markets.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Bitcoin, Microsoft, and Salesforce. The Motley Fool has a disclosure policy.