Four years ago, Michael Saylor, co-founder and chairman of MicroStrategy, turned to Bitcoin as a way to invest the company’s surplus cash instead of traditional assets like short-term Treasury bonds. This decision has transformed the software company into the largest company holding the largest cryptocurrency on the market, with Bitcoin Stock It is now worth nearly $15 billion.
However, as analysts begin to pay more attention, a new question has emerged: Can MicroStrategy’s core enterprise software business keep up with its rapidly growing Bitcoin holdings?
MicroStrategy May Temporarily Pause Bitcoin Purchases
According to Bloomberg a reportMicroStrategy’s revenue from software operations has been stagnant in recent quarters, even as the value of its Bitcoin investments has risen. This has raised concerns about the company’s ability to cover the gradual increase. Interest expense Tied to convertible debt it issued to finance its purchases of Bitcoin.
Lance Vitanza, an analyst at TD Cowen, stressed the importance of ensuring that MicroStrategy’s cash flows can cover the interest expense associated with the convertible debt the company has issued. Vitanza’s analysis suggests that any underperformance in the software segment could leave “little room for error.”
Vitanza estimates that MicroStrategy has about $45 million in interest expense and $20 million in cash taxes this year, compared with about $82 million in earnings before items like taxes. That tight cash position could prompt the company to delay the bond issue, he says. Additional debt To buy more bitcoin until next year.
To finance its bitcoin acquisitions, MicroStrategy has leveraged various methods outside of operating cash flow, including issuing more than $2 billion in convertible bonds this year.
Quarterly losses loom
Cash flow may also be impacted by an accounting change coming next year that will require MicroStrategy to mark-to-market its digital assets. The company has warned that it may need to pay a 15% alternative corporate tax if its average adjusted annual profits fall. Financial Certificate Income for any three consecutive tax year period preceding the tax year exceeds $1 billion.
“If we become subject to these new taxes under our IRA for these or any other reasons, it could materially affect our financial results, including our earnings, cash flows and financial condition,” the company said in a recent filing.
Despite these concerns, MicroStrategy Involved Bitcoin’s value has risen 156% this year, outpacing the nearly 50% jump in the price of bitcoin over the same period.
However, the company is expected to report a quarterly loss of 78 cents per share, and may need to record an impairment charge on its bitcoin stock, 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 over 3% in the past 24 hours, causing a correction in the majority of the top 100 cryptocurrencies by market cap.
Featured image by DALL-E, chart by TradingView.com