Are MicroStrategy shares worth buying now?

Experienced software company Micro strategy (MSTR 0.08%)joined several well-known corporations such as: Nvidiaas part of a forward stock split this year. The company split 10 to 1 in August.

MicroStrategy’s decision to split stock comes on the heels of a stock price skyrocketing more than 100% into 2024. In fact, shares hit a 52-week split-adjusted low of $30.71 last October, but have climbed to $200 this year. With the stock split now complete, is it time to invest in MicroStrategy?

Not necessarily. While the split lowered the individual stock price, it didn’t change the company’s overall market value. And assessing whether MicroStrategy is a good investment requires some research to untangle the confusing contradiction between the stock’s growth and the company’s mediocre fundamentals.

MicroStrategy Stock Success Analysis

Despite the stock price gains, MicroStrategy has been suffering from a downtrend in revenue. The company’s sales in the first half of 2024 were $226.7 million, down from $242.3 million in the prior year.

Adding to the discrepancy between the stock’s performance and the business’s performance is the current consensus among Wall Street analysts. They rate MicroStrategy a buy with a median price target of $194 per share, suggesting a belief in the stock’s growth. This is despite the company ending the second quarter with a net loss of $102.6 million.

How to explain this mystery? In a word, Bitcoin (CRYPTO: BTC). MicroStrategy began investing in the digital currency in 2020 and had amassed 226,500 Bitcoin by the end of July. The company describes itself as the “largest corporate Bitcoin holder in the world.”

As the cryptocurrency has risen in value over the past year, MicroStrategy’s stock has also risen. In fact, the company’s stock price tracks Bitcoin quite closely.

Data by YCharts.

In short, the company’s share price surge was driven by the appreciation in the value of its bitcoin holdings, not by the business intelligence (BI) software that launched the company in 1989.

MicroStrategy Software Division

Speaking of core BI, what is MicroStrategy doing with it now? It is integrating artificial intelligence (AI) into its software platform and moving to a subscription-based cloud computing model.

The company previously relied on selling software licenses, but the subscription approach provides predictable recurring revenue and has seen strong customer adoption. For example, subscription revenue in the second quarter was $24.1 million, up 21% from $19.9 million in the prior year.

While the subscription growth is encouraging, CEO Phong Le noted that MicroStrategy’s transition to a software-as-a-service (SaaS) model “may result in a decline in total revenue recognized in the near term, but over the long term we expect this to be more than offset by growth in subscription revenue.”

This is because software license sales recognize full revenue upfront, but with a SaaS model, revenue is recognized over the life of the subscription. This explains MicroStrategy’s trend of revenue decline. The company expects this transition period to last 12 to 18 months, after which it will begin to see year-over-year revenue growth.

Pros and cons of investing

So far, MicroStrategy’s unconventional approach to buying Bitcoin has paid off for investors. The company’s stock price has surged 1,200% since it began buying Bitcoin in 2020 through the end of July. That’s significantly more than the 64% gain S&P500 index over this period and is even better than the 948% gain for Nvidia shares.

The management team believes it can put the cash to better use on the balance sheet by investing in digital capital, specifically Bitcoin. The idea makes sense, and as long as the cryptocurrency continues to appreciate in value over time, this strategy will be beneficial for the company.

But it’s not without risk. MicroStrategy’s fortunes are now tied to Bitcoin. That means that what affects the digital currency will have a knock-on effect on the company’s stock. Regulatory changes to Bitcoin, for example, could have a significant impact on MicroStrategy.

Another factor is how the company executes its Bitcoin strategy. It funds Bitcoin purchases with cash generated by its software business, takes on debt, and issues stock. MicroStrategy’s long-term goal is to accumulate Bitcoin faster than it issues stock, in order to generate shareholder value.

However, the cryptocurrency strategy has led to the company accumulating a lot of debt on its balance sheet. At the end of the second quarter, MicroStrategy’s total liabilities stood at $4.2 billion, of which $3.8 billion was debt. Meanwhile, total assets stood at $7.1 billion, including $5.7 billion in digital assets, namely Bitcoin, and $66.9 million in cash and equivalents.

This brought MicroStrategy’s debt ratio to 0.55, or 55%, in Q2, up from 0.46 in 2023, when debt was $2.2 billion and total assets were $4.8 billion.

Then there’s the issue of MicroStrategy’s core software business. If it fails to grow that business, the company could struggle to repay its debt, let alone fund more Bitcoin purchases.

So for now, buying MicroStrategy stock is only for investors with a high risk tolerance. It’s best to consider the company after its software business shows year-over-year revenue growth and its balance sheet strengthens.