MicroStrategy Stock: Buy, Sell, or Hold?

Shares of data analytics expert MicroStrategy (MSTR -2.57%) have been riding the Wall Street roller coaster in recent years. Crypto investors may recognize the general shape of this stock’s long-term chart, since it has become a fairly tight proxy for the price moves of Bitcoin (BTC 0.52%):

MSTR data by YCharts

As such, MicroStrategy sports a highly volatile stock whose market price is based on a daring financial strategy. The fundamental business operations don’t seem to matter anymore, despite MicroStrategy’s years of experience in the red-hot artificial intelligence (AI) market.

With a 134% price gain over the last year, MicroStrategy’s stock stands just 13% below its two-year highs. On that note, is MicroStrategy a good investment idea today? Maybe it’s time to sell the stock and pocket some profits instead — or the stock might land somewhere in between these extremes.

Let’s take a look.

MicroStrategy’s strategic shift to Bitcoin investments

Any MicroStrategy investor needs to know the basics of the company’s current cash management policy.

• Under the direction of founder, then-CEO, and Bitcoin maximalist Michael Saylor, MicroStrategy converted 90% of its cash into Bitcoin in the summer of 2020. The first purchase was worth $425 million at the time, putting 38,250 Bitcoins in the company’s vaults at an average cost of roughly $11,000.
• Since that first purchase, MicroStrategy has pulled every available lever to increase its Bitcoin balance over time. The company has taken on $2.1 billion of new long-term debt and raised the number of shares by 83% since the Bitcoin investment strategy started.
• By February 5, 2024, the Bitcoin investment had grown to 190,000 digital coins at an average purchase price of approximately $31,000.
• Since the current Bitcoin price now stands at $51,800, MicroStrategy now holds $9.8 billion digital currency (and $47 million in ordinary cash reserves).

This is an extremely aggressive Bitcoin strategy. At the moment, it’s also a lucrative cash management method. MicroStrategy’s Bitcoin collection has gained 66% in total value. Michael Saylor looks like a genius right now, and the Bitcoin-based balance sheet will only look better if Bitcoin prices continue to rise.

Image source: Getty Images.

The risks of MicroStrategy’s Bitcoin focus

But the Bitcoin market is known for its wild price swings — both up and down. In February, 2023, MicroStrategy’s Bitcoin investment was 20% underwater with a total value of just $3.2 billion. Saylor was an easy lightning rod for criticism in period full of cryptocurrency scandals and crypto-banking disasters.

So if you’re investing in MicroStrategy’s bullish Bitcoin plan, you also have to be prepared for sudden price drops along the way. Don’t expect the data analytics business to provide much of a cushion to dampen the stock’s crypto-based price changes.

For instance, revenues from actual business operations fell 0.6% in the recently reported fiscal year 2023, landing at $496 million. By contrast, MicroStrategy spent $1.9 billion on Bitcoin last year. Excluding the financial impact of digital asset impairments, MicroStrategy’s business operations generated $0.8 million in operating profits and $13 million of operating cash flows. MicroStrategy’s software business is becoming a forgettable footnote to the company’s Bitcoin strategy.

The philosophy behind MicroStrategy’s Bitcoin maximalism

You can treat MicroStrategy as an alternative method for investing in Bitcoin nowadays, with the caveat that the company keeps finding new ways to buy even more digital coins along the way. Michael Saylor’s maximalist philosophy suggests that the original cryptocurrency is the only financial asset worth holding in the long run. Here, let me quote the company’s latest annual report:

We believe that bitcoin is an attractive asset because it can serve as a store of value, supported by a robust and public open-source architecture, that is untethered to sovereign monetary policy. We also believe that, due to its limited supply, bitcoin offers the potential to serve as a hedge against inflation in the long-term and, if its adoption increases, the opportunity for appreciation in value.

Management also sees its high-profile Bitcoin investment as a helpful marketing move, as the all-in crypto idea raises public awareness of the MicroStrategy brand. In the long run, Saylor (now moved from the CEO office to the post of executive chairman) hopes to invest Bitcoin profits into its software development and marketing efforts.

All told, MicroStrategy looks like a “hold” today

MicroStrategy’s investment value depends almost entirely on how you feel about Bitcoin’s prospects of gaining value in the long run — and the company’s chances of making it through every short-term challenge along the way with minimal reserves of ordinary dollars. It’s a high-risk, high reward strategy, and the same goes for MicroStrategy’s shareholder value.

And on that note, I expect another bull run in Bitcoin’s price chart over the next year or two. Another crypto winter will almost surely follow, based on the cryptocurrency market’s cyclical tendencies.

Again, your view of Bitcoin’s long-term future should override my final MicroStrategy analysis, since the two investments are so tightly intertwined. That being said, I see MicroStrategy as a direct Bitcoin investment with an extra dose of volatility and unpredictable price swings. I’d rather just buy Bitcoin itself or a Bitcoin-base exchange-traded fund such as the Bitwise Bitcoin ETF (BITB 0.39%), while keeping an eye out for overly dramatic price drops in MicroStrategy. Right now, the stock holds a total market value of $11.8 billion, essentially adding a $2 billion price premium to its Bitcoin holdings. A smaller gap would make me more interested in MicroStrategy’s stock.

In other words, MicroStrategy looks like a “hold” right now, but I might be open to buying this stock on future dips.