MSTR Stock: Is the MicroStrategy Stock Split an Investment Opportunity?

MicroStrategy [MSTR] is a software company that provides artificial intelligence-powered business intelligence tools and services.

It has a market cap of $31.9bn as of 22 July. But its software business, which in 2023 made $496.3m in revenue, is not what drives that valuation.

Co-Founder and Executive Chairman Michael Saylor invests the company’s excess capital into bitcoin holdings. As a result, MicroStrategy is the world’s largest corporate holder of bitcoin, and MSTR stock is a favourite among bitcoin advocates seeking exposure to the cryptocurrency without holding it directly.

MicroStrategy’s Stock Split

On 11 July, MicroStrategy announced a 10-for-1 stock split of its class A and class B common stock.

All holders of MSTR stock as of close on 1 August will receive nine additional shares for each one they own, which are expected to be distributed after markets close on 7 August and begin trading on 8 August. The purpose of the split is to make MicroStrategy stock more accessible to investors and employees who can’t access fractional shares via their brokers, given the recent closing price of $1,800.09.

The announcement appears to have had a positive impact on MicroStrategy’s share price, which closed 11 July up 4%, and has continued to climb since.

MSTR Stock’s Bull Run

This bounce contributed to a run that has seen MicroStrategy’s stock gain 185% year-to-date as of 22 July, and 312.25% over the past 12 months.

There is some correlation between MicroStrategy’s price movements and those of bitcoin. Indeed, Saylor’s approach of using excess capital to invest in bitcoin has led many investors to consider the stock a leveraged play on bitcoin’s price movements.

The spot price of bitcoin is up 57.5% year-to-date and 121.3% over the past 12 months.

Download the OPTO app for instant access to MicroStrategy and other innovative stocks.

Is MicroStrategy Overvalued?

In this sense, it might be more logical to compare MicroStrategy to other bitcoin proxy stocks than to other software houses.

Bitcoin miner Marathon Digital [MARA] and cryptocurrency exchange Coinbase [COIN] are appropriate comparisons for MicroStrategy.

Source: Yahoo Finance

At face value, these metrics make MicroStrategy appear significantly overvalued. It has a very high P/S ratio compared to its counterparts, and analysts don’t expect its revenue to grow at any meaningful rate over the next two years (in stark contrast to Coinbase in 2024 and Marathon in both years).

MicroStrategy Stock: The Investment Case

The Bull Case: Masterful Capital Allocation

MicroStrategy’s advocates argue that the investment case for the company hinges on its bitcoin holdings.

Jeff Ross, Founder and Managing Director of Vailshire Partners and Vailshire Capital Management, said that Saylor is “a master capital allocator” on OPTO Sessions in April. Ross compared Saylor’s bitcoin approach to “jumping on board with Berkshire Hathaway [BRK-B] back in 1970”.

Elaborating on this, Ross explained that Saylor identifies moments when MicroStrategy’s stock is overvalued relative to bitcoin, sells it, and uses the cash to buy bitcoin at a relatively cheap rate.

“If, like me, you believe in the long-term success of bitcoin, it’s the most obvious thing in the world to do what he’s doing. I think all companies, public and private, should be following his lead.”

The Bear Case: Is MicroStrategy’s Valuation Justified?

However, the market’s response to this strategy may have outweighed its intrinsic merits.

In its results for Q1 2024, MicroStrategy disclosed that it holds 214,278 bitcoins. Based on the 22 July bitcoin closing price, these have an approximate market value of $14.5bn. The rest of MicroStrategy’s business, based on its 22 July market cap, is therefore valued at $17.4bn.

This would make MicroStrategy the most overvalued company on Wall Street. It generates just under $500m in annual revenue. MicroStrategy, however, doesn’t convert every dollar of revenue into profit; in fact, during Q1 2024, it made an adjusted loss of $8.26 per share.

For MicroStrategy’s market valuation to make sense, bitcoin would have to approximately double in value. That is far from impossible — many industry experts think it is even likely during the current cycle. However, should bitcoin prices take off in this way, Marathon and Coinbase would also see their revenues increase (through higher transaction fees and, in Marathon’s case, revenue from bitcoin sales).

In other words, it is hard to envisage a scenario wherein MicroStrategy’s current valuation makes it a more strategic buy than Marathon or Coinbase — or, indeed, bitcoin itself.

Conclusion

MicroStrategy’s stock split may well make its shares more accessible to retail investors. The question those investors may want to ask themselves is whether they want that access, or whether there are better alternatives as pure bitcoin plays.

As always, thorough research is essential before taking any investment decision.

For further insight into promising growth stocks, subscribe to OPTO Foresight.