MicroStrategy Stock Forecast: Will a Bitcoin Margin Call Send It Spiraling?
Depending on how you look at it, MicroStrategy (Nasdaq: MSTR) stock is either trading at a discount or on the cusp of collapse. But that’s just based on price charts. Over the past five years, the stock price is down roughly 11%. But year-to-date, it’s down more than 70%. Much of that it because MicroStrategy CEO Michael Saylor bet big on Bitcoin (BTC). So is the MicroStrategy stock forecast as gloomy as the crypto markets? Or is it poised for a rebound?
Back in 2020, Saylor announced on an earnings call that MicroStrategy was exploring purchasing alternative assets instead of holding cash. And the company had plenty of cash-on-hand at the time. Within a month, MicroStrategy bought $250 million worth of Bitcoin. The month after that, another $175 million was added to the MicroStrategy stockpile.
Before the year closed out, MicroStrategy announced it had amassed 70,470 Bitcoins purchased for $1.25 billion. That amounts to an average price of just under $16,000 per coin. Considering we’re in the midst of a crypto winter and Bitcoin is still trading around 27% higher than its average entry price, you might think this was a pretty savvy move. But there’s a catch…
The company had taken on debt to acquire all that crypto. It sold hundreds of millions of dollars’ worth of convertible senior notes to do so. And Saylor’s bullish stance on Bitcoin continued. MicroStrategy acquired another 7,000 Bitcoins for an average price of close to $60,000 in late 2021.
Thanks to these moves, MicroStrategy stock has come to be seen as a proxy investment for actual Bitcoin. And its stock soared to highs alongside Bitcoin. And it’s tumbled just as (if not more) dramatically.
MicroStrategy Stock Forecast Looks Volatile
Before it moved into Bitcoin, MicroStrategy stock was a pretty solid middle-of-the road performer. Its financials were respectable. It was an early player in cloud-based services. The company had introduced business software for mobile platforms. It partnered with Facebook on projects. And it continued to update its popular suite of analytics tools.
But contrary to Saylor’s insistence that MicroStrategy had not turned into a Bitcoin investment firm, its business model has obviously changed. Again, before it became a Bitcoin buyer, MicroStrategy stock hovered around $150 a share. But all that Bitcoin buying catapulted shares more than nine times higher. To quote income expert Marc Lichtenfeld, “That was clearly unwarranted, and a fall was inevitable.”
At the beginning of the year, Marc put MicroStrategy stock on his five growth stocks to avoid list. He noted that it still had further to fall. That was back when it was trading at $500 a share. Well, 71 percentage points in decline later, it’s safe to say Marc was onto something. And things don’t appear to be getting any better for MicroStrategy stock.
In the fourth quarter of 2020, the company’s only debt was that aforementioned $486 million in convertible notes. Today, the company has roughly $2.3 billion in debt, according to Marc. And it doesn’t look like much of that debt was used on R&D or new hires. It seemingly accrued all that debt buying Bitcoin. And now a Bitcoin margin call is looming…
Will a Margin Call Tank MicroStrategy?
It’s well reported that MicroStrategy will face a margin call if Bitcoin falls below $21,000 a coin. MicroStrategy borrowed an estimated $205 million from the cryptocurrency bank Silvergate Capital. This allowed the company to buy more Bitcoin using the broker’s money.
The problem is that when an asset decreases enough in value, the brokerage can issue a margin call. This is to cover the deficiency in margin and return the funds in the account to the minimum value. But no matter how far Bitcoin falls in price, MicroStrategy is still on the hook for interest on the margin loan.
According to Saylor, this isn’t a big deal though. It has plenty of Bitcoin it can pledge to cover the margin call. And even if Bitcoin falls below $3,562, which would eat of the company’s crypto-on-hand, it has other collateral to post.
So this margin call is unlikely to totally tank the company or the crypto markets… At least not completely. But that feels beside the point now.
Making a MicroStrategy Stock Forecast: The Bottom Line
On top of all the questionable moves mentioned above, MicroStrategy also diluted shareholders. It sold stock in order to use the proceeds to buy more Bitcoin. And all of this Bitcoin buying has seemingly distracted the company from its foundation. In turn, sales increased a meager 3% over a 12-month period. Cash flow is also down.
To close out, we’re giving the final words of wisdom to Marc Lichtenfeld.
MicroStrategy is barely growing sales and is making less money from the sales it does make.
If MicroStrategy was simply a software company and didn’t have the Bitcoin component, it would still be overvalued, as its business is limping along.
Add in that its fortunes are at the mercy of a speculative asset, and there is a recipe for even more of a disaster than shareholders have already suffered.
MicroStrategy is going lower.
Well, there you have it. This MicroStrategy stock forecast looks like it would make a better short than long. And as Bitcoin continues to limp though 2022, we don’t anticipate much good news from the company any time soon. That is unless it manages to get back to its core function as a software company. But that seems unlikely to happen any time soon. But if it does, we’ll be sure to update our MicroStrategy stock forecast accordingly.
About Matthew Makowski
Matthew Makowski is a senior research analyst and writer at Investment U. He has been studying and writing about the markets for 20 years. Equally comfortable identifying value stocks as he is discounts in the crypto markets, Matthew began mining Bitcoin in 2011 and has since honed his focus on the cryptocurrency markets as a whole. He is a graduate of Rutgers University and lives in Colorado with his dogs Dorito and Pretzel.