Enterprise analytics and cloud-based services provider MicroStrategy Incorporated (MSTR) offers modern analytics solutions across devices via hyperintelligence products and custom applications. The Tysons Corner, Va.-based pioneer in the BI space bought more than $94 million worth of cryptocurrency last month to take advantage of a major correction in the crypto market. 

However, MSTR’s stock has dipped 23.1% in price over the past month and 30.3% over the past three months on investor anxiety surrounding its increasing investments in the volatile digital asset. Closing its last session at $482.95, MSTR’s stock is trading 16.3% below its 52-week high of $1,315, which it hit on Feb. 9, 2021.

Although the growing adoption of cloud solutions has bolstered the demand for its platform significantly, as the largest corporate owner of bitcoin, concerns surrounding the internet shutdown in bitcoin mining hub Kazakhstan could weigh heavy on MSTR’s business. In addition,  the company’s  ballooning long-term debt and weak balance sheet could negatively impact its business. So, the stock could suffer a further pullback in the near term.

Here is what could influence MSTR’s performance in the near term:

Risks in Bitcoin Investment

In the third quarter of 2021, MSTR expanded its bitcoin holdings by adding approximately 9,000 bitcoins after raising capital through an at-the-market equity offering. In December 2021, the BI company revealed in a regulatory filing that it purchased nearly 1,914 bitcoins for approximately $94.2 million in cash, at an average price of roughly $49,229 per bitcoin. However, the price of bitcoin declined to a three-month low on Jan. 7 because investors remain anxious about the U.S.’ tightening of monetary policy and an internet shutdown in Kazakhstan, the world’s second-biggest bitcoin mining hub.

Because its downtrend is expected to continue given the uncertainty faced by all markets, we think MSTR’s stock price could remain volatile in the near term.

Bleak Growth Story

Analysts expect MSTR’s revenue to increase 5.6% year-over-year to $537.75 million in its fiscal 2022. But its $1.37 consensus EPS estimate for the next quarter indicates an 11% decline from the prior-year quarter. Also, its EPS is expected to decline 7.3% year-over-year to $6.23 in 2022.

MSTR’s revenue has decreased at a 0.3% CAGR over the past five years. And its tangible book value has declined at a 10.1% CAGR over this period.

Weak Financials and Profitability

MSTR’s net loss expanded 154.2% from the prior-year period to $36.1 million in the third quarter, ended Sept. 30, 2021. It reported a $361 loss per share during this quarter, compared to $1.48 in the third quarter of 2020. Furthermore, the company’s loss from operations stood at $49.7 million, up 144.8% year-over-year. MSTR’s cash and cash equivalents came in at $57 million as of Sept. 30, 2021, versus $59.7 million as of Dec. 31, 2020. Also, its long-term debt stood at $2.15 billion as of Sept. 30, 2021.

The company’s 0.27% trailing-12-month asset turnover ratio is 57.5% lower than the 0.64% industry average. Also, MSTR’s trailing-12-month net income margin, ROA and ROE are negative 87.3%, 14.8%, and 104.1%, respectively. 

Stretched Valuation

Currently, MSTR looks very expensive. In terms of non-GAAP forward P/E, the stock is currently trading at 73.37x, which is 198.2% higher than the 24.6% industry average. Also, its 14.71 forward EV/Sales multiple is 257.5% higher than the 4.11 industry average. And MSTR’s 10.09 forward Price/Sales ratio compares with the 3.95x industry average.

POWR Ratings Reflect Bleak Prospects

MSTR has an overall F rating, which translates to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. MSTR has a D grade for Quality. This is reflective of the stock’s weak profitability.

The company has a Value grade of D, which reflects its premium valuation. Also, it has a D grade for Growth, in sync with its weak growth potential.

In addition to the grades we have highlighted, one can check out additional MSTR ratings for Sentiment, Stability, and Momentum here. MSTR is ranked #164 of 167 stocks in the F-rated Software – Application industry.

Click here to check out our Software Industry Report

Bottom Line

Even though MSTR’s digital asset strategies and growing interest in cloud-based solutions bode well for the stock, the company remains unprofitable. Its product and subscription services revenue declined more than 3% in its last reported quarter. Furthermore, as the cryptocurrency market extends its losses, the stock might decline further. So, we think it is best avoided now.

How Does MicroStrategy Incorporated (MSTR) Stack Up Against its Peers?

While MSTR has an overall POWR Rating of F, one could check out these other A-rated (Strong Buy) stocks within the Internet – Services industry: Open Text Corporation (OTEX), Commvault Systems, Inc. (CVLT), and eGain Corporation (EGAN).

MSTR shares fell $15.69 (-3.25%) in premarket trading Monday. Year-to-date, MSTR has declined -13.68%, versus a -2.47% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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