Anika Begay
Four years ago, MicroStrategy co-founder and chairman Michael Saylor turned to bitcoin to invest the company’s excess cash instead of traditional assets like short-term Treasuries. This move transformed the software company into the largest corporate holder of the largest cryptocurrency on the market, with a Bitcoin Stockpile is now worth nearly $15 billion.
However, as analysts have begun to pay more attention, a new question has emerged: Can MicroStrategy’s enterprise software business keep pace with the rapid growth of its Bitcoin holdings?
MicroStrategy May Suspend Bitcoin Purchases
According to Bloomberg relationshipMicroStrategy’s software revenues have stagnated in recent quarters, even as the value of its Bitcoin investments has increased. This has raised concerns about the company’s ability to cover the increase interest expenses associated with convertible debt issued to finance purchases of Bitcoin.
Lance Vitanza, an analyst at TD Cowen, stressed the importance of ensuring that MicroStrategy’s cash flow can cover the interest expense associated with the convertible debt the company has issued. Vitanza’s analysis suggests that any underperformance in the software business could leave “little room for error.”
Vitanza estimates that MicroStrategy will have about $45 million in interest expense and $20 million in taxes in cash this year, against about $82 million in earnings before items such as taxes. This tight liquidity, he says, could prompt the company to postpone the issuance additional debt to buy more Bitcoin until next year.
To finance its Bitcoin acquisitions, MicroStrategy has leveraged several sources beyond operating cash flow, including issuing more than $2 billion in convertible bonds this year.
Quarterly losses loom
Cash flow could also be affected by an accounting change introduced next year that would require MicroStrategy to price its digital assets on a market-by-market basis. The company warned that it may have to pay a 15% corporate alternative minimum tax if its adjusted annual average financial statement income for any three consecutive fiscal year period preceding the fiscal year exceeds $1 billion.
“If we become subject to these new IRA taxes for these or other reasons, it could have a material impact on our financial results, including our earnings and cash flows, and our financial condition,” the company said in a recent statement.
Despite these concerns, MicroStrategy actions have increased by 156% this year, far outpacing the roughly 50% jump seen by the price of BTC in the same period.
However, the company is expected to post a quarterly loss of 78 cents a share and may have to record a write-down of its Bitcoin holdings, which could make it unprofitable for 12 of the 16 quarters since it began buying Bitcoin.
At the time of writing, BTC is trading at $64,200, down more than 3% in the last 24 hours, causing a correction in most of the top 100 cryptocurrencies by market cap.
Featured image from DALL-E, chart from TradingView.com
