Bear Of The Day: MicroStrategy

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MicroStrategy (MSTR) reported its Q2 results on August 1 and got the cryptosphere buzzing as usual with the announcement of another big buy of Bitcoin.

Founder and Chairman Michael Saylor tweeted this...

"In July, @MicroStrategy acquired an additional 467 BTC for $14.4 million and now holds 152,800 BTC. Please join us at 5pm ET as we discuss our Q2 2023 financial results and answer questions about the outlook for Business Intelligence and Bitcoin."

Therein lies the problem for many Wall Street analysts trying to model the company's business and estimate revenues and earnings.

Since Saylor and MSTR are essentially "all-in" on BTC, the company's market cap at $4.9 billion is only about $300 million (6%) higher than the value of its crypto -- using a price of $30,000 for BTC, as the 50-day moving average in only $100 away.


The Big Pain

Last year, I wrote about how MSTR, whose original business model is still enterprise software design and consulting, had to take big multi-billion dollar write-downs in the value of its holdings.

That took their EPS big negative for a $93 loss in the June quarter as BTC dropped from $50,000 to $20,000 in the first half of 2022.

The volatility and uncertainty of a business strategy built around this still-young digital asset class has caused some Wall Street analysts to move on from trying to model the company's outlook and growth.

This lack of coverage makes it even harder for investors to gauge where the company's sales and profits might land in the coming quarters.


Big Swings

Clearly, if you are a big believer in BTC just like Mike, you might also be all-in for the ride back to $50,000 and beyond.

But Wall Street analysts need more visibility on the core business to make recommendations to their investment bank clients and set price targets.

And while this year's profits are expected to bounce back to +$31, revenue is projected by 2 analysts to just inch across the $500 million mark for 0.63% annual growth.

Meanwhile, next year's topline is forecast to get near $520 million for an over 3% advance. But profits are projected to plunge again back toward $2 EPS. And that comes from an analyst who just took their numbers down 22% from $2.70 after last week's report.


Q2 Reaction from a Veteran Software Analyst

This pessimism comes even after MicroStrategy delivered a huge EPS beat for the June quarter, with $2.35 vs. $0.72 equating to a positive earnings surprise of 226%.

Brent Thill of Jefferies issued a research note to clients last week where he described some of the issues that he saw and explained why he took estimates down and reiterated his $210 price target for MSTR shares.

His comments were summarized as "continued subpar execution valued at a premium."

Thill noted that the only bright spot for him was that subscription revenue, which made up ~17% of total revenues, grew +42% during the quarter, above Street estimates at 22%.

Meanwhile, the analyst wrote that "80% of MSTR's top-line shrank." This is an issue vs. many software peers who are growing faster.

MSTR management called out a tough macro environment, citing elongated deal cycles and worsening headwinds vs. 1Q. But Thill noted "We will keep our eye on MSTR's AI offering, which could come as early as Q4."

The company also announced a $750 million equity issuance. And if you've been following their moves for the past 2 years when they do this, it's usually to buy more Bitcoin.

But if they are serious about a new AI offering, it's also very likely that this capital raise will be used to fund that business development as well.

For more background on the MSTR love affair with BTC, see this article from my colleague Andrew Rocco right before earnings...

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