MicroStrategy reported robust financial performance in its recent quarter, with a net income of approximately $2.8 billion (equivalent to $8.42 per share) for Q3, driven by gains in its bitcoin holdings.
The company has reaffirmed its ambitious financial targets, including a target bitcoin price scenario of around $150,000 and substantial anticipated gains from its cryptocurrency investments.
Despite these positive earnings, several risk factors are likely impacting the stock’s performance:
1. High Dependence on Bitcoin: MicroStrategy’s significant exposure to bitcoin’s price fluctuations and the broader cryptocurrency market sentiment poses a substantial risk to its stock. A decline or stagnation in bitcoin’s value, or investor concerns about its future trajectory, can have a substantial impact on MSTR.
2. Valuation Concerns and Stretched Expectations: Some analysts argue that the stock is overvalued due to weak core revenue growth and losses in the software business. This suggests that a substantial portion of the stock’s value is attributed to bitcoin gains.
Historically, MicroStrategy’s stock has exhibited significant volatility, with only three out of ten past earnings resulting in positive one-day returns, while the majority were negative. This indicates a cautious investor sentiment.
3. Macroeconomic and Sentiment Risks: Cryptocurrencies are often susceptible to market downturns when broader risk appetite decreases, such as during inflationary surprises or regulatory concerns. For instance, a strong inflation report negatively impacted cryptocurrency stocks, including MicroStrategy.
Even when earnings are favorable, the market may react mutedly or negatively if investors anticipate higher earnings or require additional evidence of future stability.
4. Guidance and Forward Risk: While MicroStrategy’s guidance is ambitious, it may rely on optimistic assumptions, such as a high bitcoin price. If investors doubt these assumptions, they may sell even after a strong quarter.
Additionally, if there is no significant surprise or improvement in segment growth (e.g., the software segment) or if debt and leveraging are increasing, this can be a concern for investors, even if earnings appear strong at present.
In summary: MicroStrategy (MSTR) did have strong numbers, but the market may be reacting to the risks ahead more than the current quarter. As MSTR is essentially a leveraged bet on Bitcoin (and Bitcoin’s future price and regulation), it carries additional volatility and uncertainty. Consequently, the stock can decline despite a favorable earnings release if investors are concerned about:
Bitcoin not reaching the anticipated levels
The non-Bitcoin business remaining weak or too small
Macroeconomic or regulatory risks escalating
The valuation being excessively stretched