Andrew Bary
The momentum is fading from one of 2024's hottest stocks: MicroStrategy.
Shares of the big Bitcoin holder were down 6.6% Thursday to $326.46, underperforming Bitcoin, which is off 4% to about $97,000 in the past 24 hours. The iShares Bitcoin Trust, the largest Bitcoin exchange-traded fund, fell 4% Thursday.
The stock is continuing a decline that began after it hit a record intraday high of $543 on Nov. 21. The stock is down nearly 25% during the past month, even as Bitcoin prices are up about 5%. MicroStrategy stock is still up about 400% this year.
MicroStrategy is coming under pressure despite possible index-related buying tied to the company's coming addition to the Nasdaq 100 index on Dec. 23.
The Bitcoin premium embedded in the stock, measured as the enterprise value (market capitalization plus net debt) relative to the value of the company's Bitcoin holdings, continues to contract.
The company now is valued at about two times the value of its Bitcoin holdings -- some 439,000 coins, Barron's estimates. That's down from a peak of about 3.5 in November and means the stock has failed to keep pace with gains in Bitcoin recently as the cryptocurrency moved above $100,000 before pulling back.
There could be more downside in the stock given the still-lofty Bitcoin premium embedded in the stock.
The company's market value is about $79 billion against Bitcoin holdings now worth $43 billion. The company also has $7 billion in debt.
Barron's warn ed in a recent article that the premium was high and the stock was vulnerable to a pullback if the premium contracts further.
One potential boost to the stock would be the company's addition to the S&P 500 index. But that looks like a stretch.
There had been speculation about a potential S&P 500 addition after the Nasdaq move.
An accounting change due to take effect at the start of 2025 would make entry possible into the S&P 500 because it will boost the value of the company's Bitcoin holding in its financial statements and potentially lead to substantial net income if Bitcoin rallies.
But entry into the S&P 500 is a by-invitation event determined by the index committee at S&P Global Indices. The committee examines profitability, market value and other factors.
And S&P, which declined to comment on MicroStrategy's entry prospects , may view the company as more like a closed-end fund than a true operating business. Closed-end funds make investments and issue stock to fund them. Closed-end funds and ETFs aren't eligible for inclusion in the S&P 500.
Nasdaq takes a more mechanical approach in adding companies to the Nasdaq 100. Market value is critical there.
MicroStrategy has a small software business -- its heritage operation before it began buying bitcoin in 2020 -- but that operation could be worth only about $1 billion. That business has been unprofitable on a GAAP basis, making the company ineligible for inclusion in the S&P 500 based solely on that.
The accounting change will result in a revaluation of the company's Bitcoin to fair market value from currently low carrying values. Starting next year, the company will report in its earnings the change in the value of its Bitcoin holdings each quarter.
New York accounting expert Robert Willens says the changes in fair value will be included in net income just as changes in the values of Berkshire Hathaway's equity portfolio are reported in earnings each quarter.
MicroStrategy chairman Michael Saylor, in a recent interview, wouldn't offer an opinion on whether the company will be added to the S&P 500, but said that the company could report billions of dollars of quarterly net income from the rising value of its Bitcoin holdings next year given his bullish view on the cryptocurrency. The accounting changes could permit MicroStrategy to meet the profit requirements for entry into the index.
Analysts have been bullish on the company, citing the company's ongoing purchases of Bitcoin funded with equity and debt sales. The company has raised about $17 billion since the end of October, mostly via equity sales, and used the proceeds to buy Bitcoin.
Benchmark analyst Mark Palmer has a Buy rating and $650 price target based on a sum-of-the-parts valuation using 2026 estimates for the company's Bitcoin holdings. He forecasts a 2026 year-end price that year of $225,000.
Analysts have been willing to put a P/E multiple on the theoretical earnings that the company creates when it issues stock or bonds to buy bitcoin. The company refers to a Bitcoin 'yield" or change in the ratio of bitcoin holdings to shares outstanding over time. That figure has been over 70% this year, the company said.
But "yield" is dependent on the company selling stock at a premium to the value of its Bitcoin holdings -- and is far from assured.
The large MicroStrategy premium is a 2024 phenomenon. MicroStrategy traded at close to parity relative to the value of its Bitcoin holdings in 2022 and 2023, ending 2023 at a roughly 20% premium.
This makes MicroStrategy stock vulnerable to further declines if the premium to Bitcoin continues to bleed away and the cryptocurrency undergoes a selloff.
Write to Andrew Bary at andrew.bary@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 19, 2024 18:13 ET (23:13 GMT)
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