Shares of MicroStrategy (MSTR) have been on an absolute tear in the last four years. Since May 2020, the tech stock has risen from $122 to more than $1,050 today, crushing the broader markets by a wide margin.
In 2024 alone, MSTR is up 68.6% - even as the shares trade 46.7% below their YTD highs.
In 2020, MicroStrategy’s founder and CEO became bullish on Bitcoin (BTCUSD) and started aggressively accumulating the digital asset. In fact, the company has raised debt capital to purchase BTC, which most investors consider an extremely risky venture.
MicroStrategy held 214,400 BTC as of Q1 of 2024, making it the largest corporate holder of the cryptocurrency. At the current price, these holdings are worth roughly $12 billion, compared to its cost price of $7.5 billion.
It's evident that MicroStrategy's stock price will be closely tied to BTC prices. Moreover, its monstrous gains in recent years might even make it eligible to be added to the S&P 500 Index ($SPX). Let’s see why.
MicroStrategy Should Adopt New Accounting Standards, Says Analyst
According to a pre-earnings analyst note from investment firm Benchmark, MicroStrategy should consider adopting new accounting standards. This would shore up its earnings, helping to secure the company's place in the flagship S&P 500 Index.
Benchmark analyst Mark Palmer explains that MicroStrategy recorded impairment losses of $2.27 billion due to a FASB (Financial Accounting Standards Board) rule. Under the accounting rule called ASC 350, firms with exposure to cryptocurrencies are treated as “indefinite-lived intangible assets” similar to trademarks and copyrights.
So, MicroStrategy records Bitcoin at the historical price, and these holdings are reviewed each quarter for impairments. Now, the holdings are impaired if asset prices decline during the reporting period, leading to MicroStrategy's $2.27 billion write-down.
According to a Seeking Alpha report, the FASB drafted new rules in 2023 allowing companies to record gains or losses immediately and to classify cryptos as financial assets. If MicroStrategy shifts to the new rule, the earnings impact would be significant, increasing its retained balance by roughly $3.1 billion, explained Palmer.
MSTR stock already meets most of the requirements to join the SPX, per Palmer - it's highly liquid, with a market cap of $18 billion - but the accounting shift would help get MicroStrategy over the final hurdle to consistently positive earnings. Inclusion in the S&P would draw new buyers to MSTR, as money managers adjust their holdings to track the benchmark index.
However, according to the analyst, MicroStrategy might not shift to the new accounting standard due to the tax implications.
How Did MSTR Perform in Q1 of 2024?
Since that Benchmark note, the company has released its latest quarterly results, and it seems S&P eligibility will have to wait for now.
In Q1 of 2024, MicroStrategy reported revenue of $115 million, down from its year-ago revenue of $122 million, and below consensus revenue estimates of $121.7 million. Further, MicroStrategy reported a net loss of $186 million, or $8.26 per share - much higher than its $3 million loss in the same quarter last year. Wall Street expected MSTR to report earnings of $0.33 per share in Q1.
Despite the red ink, each of the four analysts covering MSTR stock recommends a “strong buy.”
The analysts' mean target price for the tech stock is $1,733.75, indicating an upside potential of over 62% from current levels.
Due to its vast exposure to Bitcoin, MSTR stock prices will be tied to BTC, making it quite volatile compared to other tech stocks. The recent decline in BTC prices has driven down shares of MSTR by 35% in the past month, allowing you to buy the dip - especially if you expect BTC prices to move higher going forward.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
