MicroStrategy’s Bitcoin Bet on Verge of Accounting Windfall for Investors

MicroStrategy’s Bitcoin Bet on Verge of Accounting Windfall for Investors

(Bloomberg) — MicroStrategy Inc. may be at an inflection point when it comes to Michael Saylor’s controversial decision almost four years ago to bet the enterprise-software maker’s future on Bitcoin.

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Quarterly results will likely get more volatile under a recently approved accounting rule change that requires valuing the digital asset at market prices. Before the revision, MicroStrategy had to take impairment charges to write down the value of its Bitcoin when prices fell but couldn’t recognize any increases. It has until 2025 to implement the change.

If Tysons Corner, Virginia-based MicroStrategy decides to adopt the revision for the fourth quarter, the Bitcoin on the company’s balance sheet will surge by billions of dollars on the back of recent purchases and Bitcoin’s almost 60% rally in the period. That’s as investors are probably looking at a loss of around $5.8 million when it reports results later Tuesday, analysts surveyed by Bloomberg forecast.

In 2020, MicroStategy became the first public company to buy Bitcoin as a capital allocation strategy, with co-founder and chairman Saylor subsequently saying the firm needed to embrace the policy to survive. While Saylor has won the admiration of digital-asset proponents, no other US public company besides Tesla Inc. and a handful of crypto-related firms have decided to hold the volatile cryptocurrency on its balance sheet. MicroStrategy owned 189,150 Bitcoin at the end of December.

“Look, his stringent views on Bitcoin are not earning him many fans in the institutional investment community, or have not to this point,” said Lance Vitanza, an analyst at Cowen, which has an “outperform” rating on MicroStrategy’s shares. “Now this may change.”

Even though quarterly results have been whipsawed by the fluctuating price of Bitcoin, those keeping faith in Saylor have largely been rewarded. MicroStrategy shares have surged more than 300% since July 2020, while the benchmark Standard & Poor’s 500 increased around 60% and the tech-heavy Nasdaq 100 gained 70% or so during the same period.

The company’s Bitcoin holdings, which were listed at $1.8 billion entering the year, will be updated to roughly $8 billion, and more in line with the company’s current market capitalization. The change in accounting, if adopted, would only be part of the story, as the firm added 30,905 Bitcoin this quarter, worth more than $1 billion by December 31.

Meanwhile, MicroStrategy is expected to report revenue of about $133 million, little changed from the year-ago quarter, forecasts show. Going forward, and with revenue growth flat, MicroStrategy’s bottom line will most likely be exposed more to the whim of the price of Bitcoin, analysts said.

“Every three months, it’s going to be up or down,” Vitanza said.

The additional volatility risk comes as the company — known as a Bitcoin proxy — already faces fresh competition for investors. About a dozen spot Bitcoin ETFs debuted in January, shaving MicroStrategy stock’s premium in relation to Bitcoin. That’s because investors who have been reluctant to directly purchase the cryptocurrency can gain exposure through the exchange-traded funds, many of which initially aren’t charging any fees.

MicroStrategy declined to comment on when it will implement the new accounting rules.

“I think it would be in the company’s best interests, I think they should adopt right away,” Vitanza said. “They fought for this, so why not do it.”

–With assistance from Nicola M. White.

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