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MicroStrategy Stock Plummets as Bitcoin Crashes: Time to Buy?

microstrategy

MicroStrategy stock is trading sharply lower in US market price action today amid the crash in bitcoin prices. Should you buy the dip in the stock?

MicroStrategy’s core business is into providing business intelligence. However, the company has gradually morphed into a dual business where it has been acquiring bitcoins. Looking at the core business, MicroStrategy reported revenues of $122.9 million in the first quarter of 2021 which were 10.3% higher than the corresponding quarter in 2021.

Bitcoin strategy

The management is optimistic about the bitcoin strategy. “MicroStrategy’s first quarter results were a clear example that our two-pronged corporate strategy to grow our enterprise analytics software business and acquire and hold bitcoin is generating substantial shareholder value.  We had one of our strongest operational quarters in our software business in years, highlighted by 10% revenue growth and continued improvement in non-GAAP profitability,” the company said in its first-quarter 2021 earnings.

MicroStrategy expands investment into bitcoins

Meanwhile, MicroStrategy has been expanding its investments into bitcoins. Today the company revealed that it has purchased 13,005 bitcoins for around $489 million at an average price of nearly $37,617 per bitcoin. The purchase looks like an apparent bid to capitalize on the recent crash in bitcoin prices. Meanwhile, bitcoin prices are plummeting further today amid China’s crackdown on cryptocurrency trading as well as mining.

MicroStrategy now holds 105,085 bitcoins which have a purchase price of approximately $2.741 billion with an average purchase price of approximately $26,080 per bitcoin. Despite the crash in bitcoin prices, the company is sitting on market-to-market gains on the investment and the current value of these bitcoins is around $3.5 billion.

Debt and equity issuance

Meanwhile, MicroStrategy has been using a mix of debt and equity issuance to finance bitcoin purchases. The company had raised $1 billion in the first quarter and has continued to raise more capital to finance its bitcoin purchases. Earlier this month, it announced senior secured notes offering with an annual coupon of 6.125% and maturing in 2028. It also announced at-the-market equity offering to raise $1 billion by selling shares.

The company’s CEO Michael Saylor defended the capital raise and said “We rotated our shareholder base and transformed ourselves into a company that’s able to sell enterprise software and to acquire and hold bitcoin, and we’ve done it successfully with leverage.” He added, “That has increased the power of the brand by a factor of 100. We just had our best software quarter … in the last 10 years last quarter,”

MicroStrategy stock has been volatile

Meanwhile, MicroStrategy stock has been very volatile in 2021. The stock is still up 66% for the year. However, it is down over 54% from its 52-week high of $1,315 that it hit earlier this year. Notably, that was the highest price level for the stock since the dot com boom days. While some have been critical of the company for pivoting towards bitcoins, Saylor is not perturbed. “The bitcoin business is driving shareholder returns. I think the employees are happy. The shareholders are happy,” Saylor said speaking with CNBC.

Bitcoin prices

Bitcoin prices have been very volatile in 2021. However, some companies including Square and Tesla have used them to park their excess cash. Tesla invested $1.5 billion in bitcoin in the first quarter of 2021 and sold 10% of them in the quarter. It booked a gain of $102 million on the trade which catapulted its earnings to a record high. The company also allowed bitcoins as a payment mode.

Elon Musk on bitcoins

However, soon Musk had a change of opinion over bitcoins. He said that the electric vehicle maker has “suspended vehicle purchases using Bitcoin” as the company is “concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel.”

Musk added, “Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost to the environment. Tesla will not be selling any Bitcoin and we intend to use it for transactions as soon as mining transitions to more sustainable energy. We are also looking at other cryptocurrencies that use <1% of Bitcoin’s energy/transaction.”

Later Musk clarified that Tesla is not selling the bitcoins that it is holding and looked amenable to accepting bitcoins again if the cryptocurrency can improve its energy efficiency.

MicroStrategy

Meanwhile, MicroStrategy is a play on bitcoin prices more than the core business. Of the five analysts covering the stock, three have a buy rating while one each rates it as a hold and sell. The stock’s average target price of $690 is around a 17% premium over current prices.

If bitcoin prices recover from these levels, MicroStrategy stock would also rebound. Bitcoin prices are down over 50% from their highs which has led to a sell-off in bitcoin miners as well as companies like MicroStrategy that hold bitcoins.

How to trade in MicroStrategy

You can trade in stocks like MicroStrategy through any of the reputed online stockbrokers. Alternatively, if you wish to trade derivatives, we also have reviewed a list of derivative brokers you can consider. An alternate way to play the cryptocurrency theme could be through buying stocks of companies that mine bitcoin. You can trade in cryptoassets like bitcoin through any of the best cryptocurrency brokers.

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Mohit Oberoi is a freelance finance writer based in India. he has completed his MBA with finance as majors and also holds a CFA charter. He has over 13 years of experience in financial markets. He has been writing extensively on global markets for the last six years and has written over 6,500 articles. He mainly covers metals, electric vehicles, asset managers, and other macroeconomic news. He also loves writing on personal finance and topics related to valuation.