MicroStrategy’s Bitcoin Play Raises Questions About Nasdaq 100 Inclusion
(Bloomberg) — Michael Saylor’s MicroStrategy Inc. checks all the boxes for inclusion in the Nasdaq 100 Index, a development that would trigger purchases of the shares by the $451 billion worth of exchange-traded funds around the world that directly track the benchmark.
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Yet market watchers are entertaining the possibility it gets snubbed in the index’s annual reshuffling on Friday for one simple reason: MicroStrategy has morphed into a levered bet on Bitcoin attached to a small software company that many say has no business being among the 100 most-important stocks on the Nasdaq.
“The idea of an index is it’s supposed to really represent faithfully the body of stocks that are in the universe,” said TD Cowen analyst Lance Vitanza, who has a “buy” rating on MicroStrategy. “Any large company that makes up a material portion of the Nasdaq universe should be reflected as being in the index.”
Shares of the Tysons Corner, Virginia-based firm co-founded by Saylor have mesmerized Wall Street this year by surging more than 500% as the company accelerates an unconventional plan to raise capital solely to purchase and hold more Bitcoin. It has announced multibillion-dollar acquisitions of the cryptocurrency every Monday over the past five weeks.
With the token’s price reaching all-time highs recently, MicroStrategy now holds more than $40 billion worth of Bitcoin. But its underlying business had a net loss of $340 million in third quarter of this year. Still, the company’s $98 billion market capitalization, which would make it roughly the 40th biggest stock in the Nasdaq 100, is largely based on its Bitcoin buy-and-hold strategy, and this could factor into whether the stock is added to the Nasdaq 100.
Nasdaq could use the small size of MicroStrategy’s operating business as a reason not to add the company to the index, Vitanza said. However, that would be counterintuitive since the company’s market capitalization is so large, he added.
‘Bitcoin Treasury Company’
MicroStrategy’s software business offers it a benefit when it comes to inclusion in the Nasdaq benchmark, as financial companies are ineligible for the Nasdaq 100. MicroStrategy has called itself a “Bitcoin Treasury Company,” but since its revenue comes from its software business, it is classified as a technology company by the Industry Classification Benchmark, making it fair game for the index. The ICB could choose to reclassify MicroStrategy as a financial stock during the next change in March, according to Bloomberg Intelligence analyst James Seyffart.
Michael Lebowitz, a portfolio manager at RIA Advisors, said that MicroStrategy is now more similar to a commodity or an ETF since it is “essentially a dead company” without its Bitcoin. He thinks it should be reclassified as a financial-company next year.
“One hundred percent of the value of the company is Bitcoin because the rest of the company is potentially a negative,” Lebowitz said in an interview. “A large majority of the company is just purely its Bitcoin holdings and the financial machinations around it, so it is a financial company.”
Nonetheless, should it be added to the index, it would “introduce the potential for very large amounts of passive inflows into MicroStrategy shares and could provide a boost to its stock,” said Benchmark analyst Mark Palmer, who also has a “buy” recommendation on the stock.
MicroStrategy aims to raise $42 billion in capital from equity and fixed income securities offerings over the next three years, and has already surpassed its 2025 goal for equity. An increase in its stock price from inclusion in the index would help the company issue stock at premium and support its overall strategy of purchasing more Bitcoin, Palmer said.
The increase in trading of the shares should the company be added to the index might not make a big difference to its liquidity, but it would bring in new investors, TD’s Vitanza said.
“If you think about the liquidity in the stock and the volume of shares that trade, it’s not all that much,” Vitanza said. “But it will be new pockets of capital, so I think that the people that are going to wind up owning the stock on the other end of the index are clearly different people that are buying stock in the at-the-market” price.
Joining the broader US benchmark, the S&P 500 Index, would be a different story. The S&P 500 considers the profitability of new additions to its index, which could be a barrier for MicroStrategy, which has posted net losses for three of the past four quarters.
“The fact that they are not a traditional operating company in the traditional sense of the way that we describe that, I think, has much more of a bearing on the S&P 500 than it does in the Nasdaq 100,” Vitanza said.
The Nasdaq index has long differentiated itself from the S&P 500 by focusing on non-financial companies, and only those listed on Nasdaq. The exchange itself has launched its own digital-asset products, offering a software platform for crypto exchanges to go to market.
Palantir Technologies Inc. and Axon Enterprise Inc. could also be added to the Nasdaq 100, according to Bloomberg Intelligence. Changes to the index will take effect on Dec. 23.
