As a seasoned investor with a keen eye for spotting trends and understanding their implications, I find myself intrigued by MicroStrategy’s Bitcoin adventure. Four years ago, I would have laughed at the idea of a software company turning its excess cash into Bitcoin, but here we are today, with MicroStrategy sitting pretty as the largest corporate holder of the cryptocurrency.
Four years ago, as a crypto investor, I found myself in a position where MicroStrategy’s co-founder and Chairman, Michael Saylor, made an intriguing decision. Instead of pouring our excess cash into traditional assets like short-term Treasuries, he opted for Bitcoin. This bold move has significantly reshaped our software firm, transforming us into the largest corporate holder of the world’s most prominent cryptocurrency. Today, our Bitcoin stash is worth a staggering nearly $15 billion.
Yet, as more scrutiny is being applied, a fresh query arises: Is MicroStrategy’s core enterprise software business able to match the swift expansion of its Bitcoin assets?
MicroStrategy May Pause Bitcoin Purchases
Based on a Bloomberg report, MicroStrategy’s software income appears to have remained flat in recent periods, while the worth of its Bitcoin investments has significantly increased. This situation has sparked worries about the company’s capacity to meet the additional interest payments connected with the convertible debt it acquired to finance its Bitcoin acquisitions.
Lance Vitanza, a TD Cowen analyst, highlighted the necessity of managing MicroStrategy’s cash flow to cover the costs related to their convertible debt. According to his assessment, potential weaknesses in the company’s software operations might not leave much room for flexibility.
As a researcher, I’ve projected that MicroStrategy might be facing approximately $45 million in interest expenses and around $20 million in cash taxes this year. These figures are in contrast to their estimated earnings before tax-related items, which stand at about $82 million. Given this tight cash situation, I speculate that the company may choose to postpone taking on more debt to purchase additional Bitcoin until next year, to allow for better financial maneuverability.
MicroStrategy has resorted to methods other than just operational cash flow to finance its Bitcoin purchases, one of which includes the issuance of more than 2 billion dollars worth of convertible notes this year.
Quarterly Losses Loom
1. The potential impact on cash flow might stem from an accounting modification set for next year, which mandates MicroStrategy to assess its digital assets based on current market value. The firm has issued a cautionary statement, indicating that it could be liable for a 15% alternative minimum tax on corporations if the average annual adjusted financial statement income for any three consecutive years prior to the tax year surpasses $1 billion.
In a recent statement, the company expressed that if they are required to pay these new taxes according to the IRA, regardless of the reason, it could significantly impact their financial performance, encompassing net income and liquidity, as well as their overall financial status.
In spite of the expressed worries, MicroStrategy’s stocks have skyrocketed by an impressive 156% this year, significantly exceeding Bitcoin’s approximate 50% increase in value over the same duration.
Despite predictions that the company will report a quarterly loss of approximately $0.78 per share, and may have to recognize an impairment expense related to its Bitcoin holdings, potentially leading to 12 out of the last 16 quarters of unprofitability in this area since its Bitcoin purchases began.
Currently, Bitcoin (BTC) is being transacted at approximately $64,200. In the past 24 hours, it has dropped by more than 3%, triggering a correction in the prices of many top 100 cryptocurrencies as ranked by market capitalization.
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2024-08-02 11:14