Stock Split Watch: Is MicroStrategy Next?

With the recent news that the fast-casual restaurant chain Chipotle Mexican Grill plans a 50-for-1 stock split, many investors might wonder which publicly traded company could be next.

MicroStrategy (NASDAQ: MSTR), an enterprise software company that shifted its focus to buying and holding Bitcoin (CRYPTO: BTC) in 2020, could benefit from a split since its stock is trading close to $1,900 per share. Let’s explore why a company might split its stock and whether MicroStrategy might entertain such a move.

What’s a stock split?

A stock split occurs when a company divides its existing shares into multiple shares, effectively increasing the number of available shares while maintaining its market capitalization. While shareholders end up with more shares, their ownership percentage and the total worth of their investment stay the same.

For example, suppose you hold 10 shares of a company priced at $100 per share. If the company executes a 2-for-1 stock split, you would then own 20 shares valued at $50 each, while your total investment value would remain at $1,000.

Why would a company split its stock?

When a stock like MicroStrategy has a high price, it might become too expensive for many individual investors. While some brokerages offer fractional shares, others (like Vanguard) do not.

Lowering the share price makes a stock more accessible to a broader range of investors, which in theory could drive up demand for the company’s shares and increase its market value.

A decrease in stock price can benefit options traders by making them more affordable. This may attract more participants to the options market and open up opportunities for traders to implement strategies at lower costs, thus bringing more visibility to the stock.

MicroStrategy has split its stock before

MicroStrategy went public in 1998, and in early 2000, the company split its stock 2-for-1 as it reached an all-time high. Similar to other dot-com companies, the bubble burst soon after, and MicroStrategy undertook a 1-for-10 reverse split in 2002 to meet the minimum-price requirements of a Nasdaq listing.

Executive Chairman Michael Saylor oversaw the company through its previous stock split and reverse stock split. Given the stock’s past scars and volatility, with a 52-week high of $1,900 and a 52-week low of $230, Saylor could arguably be more hesitant this time around. No one at the company has commented in public on a potential stock split.

Is MicroStrategy a buy ahead of a likely stock split?

It’s typically not recommended to base investment decisions solely on the potential for a stock split. Instead, a company’s financial performance should be of much greater importance when evaluating a stock’s long-term potential.

With that said, MicroStrategy is not like any other publicly traded company on the market because, facing limited growth prospects in its software business, it decided to purchase $250 million of Bitcoin in 2020 — and hasn’t stopped buying it since.

Today, the company holds 214,246 bitcoins, acquired for $7.53 billion at an average price of $35,160 each. With Bitcoin trading for approximately $69,400, the unprecedented bet has paid off for MicroStrategy investors thus far, with its stock up over 1,400% since the company initiated the new approach.

Image source: Getty Images.

Still, prospective buyers should know a few things before investing in MicroStrategy today. First, the company’s balance sheet has taken a considerable hit, with its net cash of $531 million transformed into $2.1 billion in net debt since its spending spree began.

Second, the company’s number of outstanding shares has surged from 9.7 million in August 2020 to 17 million today, diluting the shares by 83%. Most of the cash generated by these stock sales was reinvested in even more Bitcoin.

The company’s debt and share dilution will likely continue, as Microstrategy recently announced two convertible notes at $800 million and $600 million to fund its latest Bitcoin spending spree. Convertible notes are a type of financial instrument that represents debt and holds the potential to be transformed into stock shares at a future time. These notes are set to reach maturity in 2030 and 2031, respectively, unless they’re repurchased, redeemed, or converted earlier, per the conditions outlined in their terms.

Even for Bitcoin enthusiasts, MicroStrategy stock is starting to make less sense than buying the cryptocurrency directly or through one of the newly approved Bitcoin exchange-traded funds. That’s because, as of this writing, the company has an enterprise value (market capitalization plus net debt) of $34.8 billion yet holds $14.9 billion worth of Bitcoin.

Therefore, prospective investors are paying a significant premium for MicroStrategy, which generated $496 million in revenue for 2023, down 1% from $499 million in 2022. That makes this stock an unfavorable arbitrage play, and prospective investors should avoid the stock at today’s lofty price.

Should you invest $1,000 in MicroStrategy right now?

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Collin Brantmeyer has positions in Chipotle Mexican Grill. The Motley Fool has positions in and recommends Bitcoin and Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

Stock Split Watch: Is MicroStrategy Next? was originally published by The Motley Fool