By now you've all seen the beatdown laid upon Bitcoin, and the entire crypto-sphere this weekend. It got me thinking... what about all of the public firms that had made a showing of adding Bitcoin to their balance sheets? Is this the bottom? How could we know?
This is the lowest price for Bitcoin since late 2020. It still doesn't buy you anything. It still does not serve as either a medium of transaction nor a store of value. Physical gold may not serve as a medium of transaction in 2022, but the yellow metal certainly has held its value in this inflationary environment. Store of value? For gold? Check. Bitcoin? Bzzzz!
MicroStrategy IncorporatedMicroStrategy Incorporated ( MSTR) , famously led by CEO Michael Saylor, reported the firm's first quarter financial results back on May 2nd. The stock had peaked at $1,351 back in February 2021. The stock closed at $203.36 on Friday. I see that stock priced close to $156 in early Monday trading. That's down more than 24% over the weekend.
For that first quarter, MSTR posted an adjusted loss of $10.42 per share (GAAP EPS: $-11.58), missing estimates by a country mile. No, make that like eight or 10 country miles. Revenue of $119.3M also fell short of consensus and was good enough for year over year "growth" of -2.9%. The firm's claim to fame, more than their software businesses, has been their position as the leading public company investor in Bitcoin, a position that the firm has furthered through the issuance of Bitcoin-backed term debt.
You already see where this is going, don't you? MicroStrategy, as of the end of their first quarter, had 129,218 Bitcoins with a carrying value of $2.896B on their balance sheet, reflecting cumulative impairment losses of $1.071B since acquisition, making the average carrying value equal to $22,409 per Bitcoin. The original cost basis at that time amounted to $3.967B or $30,700 per Bitcoin, while the market value of these holdings was priced then at $45,602.79 a piece or $5.893B. Times have changed.
The Balance Sheet
Going back to the end of Q1, MicroStrategy generated free cash flow of $-15.28 per share for that three month period. This was the eighth consecutive quarter of negative free cash flow for MicroStrategy. MicroStrategy closed the quarter with $92.7M in net cash on the books, and current assets of $247M. This measures up very poorly against current liabilities of $304.9M, leaving the firm with a current ratio of just 0.81. This suggests that MicroStrategy could run into trouble meeting short to medium term obligations unless things change.
The firm had $3.638B in long term assets, comprising $2.913B described as "other", which is obviously primarily Bitcoin. The firm does not make an entry for intangible assets, which we appreciate. Total liabilities add up to $2.775.4B, which is mostly $2.361.9B in long-term debt. We have already discussed that debt. It's backed by Bitcoin. Bitcoin is now worth a lot less than it was not even a couple of months ago.
At the time this balance sheet was published, MicroStrategy had a tangible book value of $76.38 per share. That's due to the large holding of Bitcoin. So, the firm operationally... has lost money for five consecutive quarters. Free cash flow appears to be perpetually negative. The firm has become (a long time ago) a Bitcoin holding company. I think there is a decent chance that MicroStrategy will have to sell Bitcoin at some point in order to fund operations.
The Current Quarter
MicroStrategy is expected to report the current quarter in either late July or early August. I have checked three sources for expectations. There is no consensus. According to those three sources, Q2 EPS is expected to print at either $-0.50 or $-0.85 or $-2.20. Revenue for the quarter is expected to land in between $121M and $125M. The year ago comp is $125.4M.
Buy This Dip?
MSTR opened at a deep discount on Monday. Will it challenge the mid-May low of $134? Possibly, and that's kind of what I am getting at. This stock could prove to be an excellent day or short-term trading vehicle today and perhaps all week.
The volatility here could be a way for a trader trying not to be an investor in these markets to make a few bucks, but that trader would have to stay on top of the situation from bell to bell and beyond. There is no "set it and forget it" plan here.
As for investors who are not traders, would I buy MicroStrategy? Only if I were a true believer in Bitcoin and I was using this stock as a proxy for Bitcoin because stock markets are a lot more reliable than crypto markets when under duress.
That said, I would not buy MSTR with my money or yours unless I was willing to babysit the position for as long as I have it. I see no reason to invest in the software business of this firm. Verdict? Day trade or take a pass. This is probably not the end of crypto, but it could be the beginning of a very long and painful winter and if it is, there is absolutely no reason to be in this stock.