MicroStrategy’s Bitcoin Play Raises Questions About Nasdaq 100 Inclusion

By Investor Empires On Dec 12, 2024

(Bloomberg) — MicroStrategy Inc. Michael Saylor’s affiliate is examining all funds for inclusion in the Nasdaq 100, a development that would lead to stock buying by the $451 billion worth of exchange-traded funds around the world that directly track the index.

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However, market watchers are pondering the possibility that it was overlooked in the index’s annual revision on Friday for one simple reason: MicroStrategy has turned into a backed bet on Bitcoin tied to a small software company that many say has no right to be among the top 100 companies. Stocks on Nasdaq.

“The idea of the index is that it is supposed to faithfully represent the pool of stocks that exist in the universe,” said TD Coin analyst Lance Vitanza, who has a “buy” rating on MicroStrategy. “Any large company that is a material part of the Nasdaq universe should be reflected as being on the index.”

Shares of the Tysons Corner, Virginia-based company, which Saylor co-founded, have dazzled Wall Street this year by rising more than 500% as the company accelerates an unconventional capital-raising plan just to buy and hold more bitcoin. It has announced billions of dollars in cryptocurrency acquisitions every Monday for the past five weeks.

With the token price recently reaching all-time highs, MicroStrategy now owns over $40 billion worth of Bitcoin. But its core business posted a net loss of $340 million in the third quarter of this year. However, the company’s market capitalization of $98 billion, which would roughly make it the 40 largest stock on the Nasdaq 100, is largely based on a buy-and-hold strategy for Bitcoin, and this could influence whether the stock will be added to the Nasdaq 100. .

Nasdaq could use the small size of MicroStrategy’s operating business as a reason not to add the company to the index, Vitanza said. That would be counterintuitive because the company’s market capitalization is so large, he added.

“Bitcoin Treasury Company”

MicroStrategy’s software business offers a benefit when it comes to inclusion in the Nasdaq, as financial companies are not eligible to join the Nasdaq 100. MicroStrategy has called itself a “Bitcoin treasury company”, but since its revenues come from its software business It is also classified as a technology company by the industry classification standard, making it fair game for the index. The ECB could choose to reclassify MicroStrategy as a financial stock during the next change in March, according to Bloomberg Intelligence analyst James Seyfart.

MicroStrategy now looks more like a commodity or ETF because it is a “fundamentally dead company” without its bitcoin, said Michael Lebowitz, a portfolio manager at RIA Advisors. He believes it should be reclassified as a financial company next year.

“One hundred percent of a company’s value is Bitcoin because the rest of the company is probably passive,” Lebowitz said in an interview. “The vast majority of the company is just its holdings of Bitcoin and the financial machinations surrounding it, so it is a financial company.”

However, if added to the index, it “would introduce the potential for very significant amounts of downside flows into MicroStrategy shares and could provide a boost to its shares,” said Benchmark analyst Mark Palmer, who also has a “buy” recommendation on the stock.

MicroStrategy aims to raise $42 billion in capital from equity and fixed-income securities offerings over the next three years, and has already exceeded its 2025 target for equities. Ballmer said the increase in its share price from inclusion in the index will help the company issue shares at a premium and support its overall strategy of buying more bitcoin.

TD’s Vitanza said the increase in stock trading if the company is added to the index may not make a big difference to its liquidity, but it will attract new investors.

“If you think about the liquidity in stocks and the volume of shares traded, it’s not a lot,” Vitanza said. “But it will be new pockets of capital, so I think the people who will end up owning stocks at the other end of the index are clearly different people buying stocks at market price.”

Joining the broader US benchmark, the Standard & Poor’s 500, will be a different story. The S&P 500 takes into account the profitability of new additions to its index, which could be a drag for MicroStrategy, which has posted net losses in three of the past four quarters.

“I think the fact that it’s not a traditional operating company in the traditional sense of how we describe it has a much greater impact on the S&P 500 than it does on the Nasdaq 100,” Vitanza said.

The Nasdaq has long distinguished itself from the S&P 500 by focusing on non-financial companies, only those listed on the Nasdaq. The exchange itself has launched its own digital asset products, offering a software platform for cryptocurrency exchanges to bring to market.

It is also possible to add Palantir Technologies Inc. and Axon Enterprise Inc. to the Nasdaq 100, according to Bloomberg Intelligence. Changes to the index will take effect on December 23.