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MicroStrategy Stock Slumps: Was Deep Earnings Loss Just an Accounting Quirk?

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Bitcoin (BTC-USD) isn’t a business and doesn’t have earnings reports, but its price movements can have profound effects on cryptocurrency-associated companies. A case in point is MicroStrategy (NASDAQ:MSTR), which is about as crypto-immersive as a business can get.

A quick search-engine query might suggest that MicroStrategy is an enterprise software developer. That’s certainly part of its business model, but MicroStrategy has emerged in recent years as an aggressive bitcoin hoarder.

Hoarding vast amounts of bitcoin may seem like an odd business to be in. However, it makes sense during a time when some traders are looking for leveraged bets on bitcoin’s bull run. MicroStrategy stock does tend to rally when bitcoin does, but as investors discovered on Tuesday, not every day is a bright one.

How much bitcoin does MicroStrategy have?

For most reporting companies, the quarterly headline news involves revenue and income. It’s different for MicroStrategy though, as it literally printed the size of its bitcoin hoard in the title of its quarterly press release.

Here’s what you need to know about MicroStrategy’s first-quarter results. The company has acquired 25,250 bitcoins since the end of the fourth quarter and held an astonishing 214,400 bitcoins as of April 26. According to MicroStrategy President and CEO Phong Le, this represents the company’s 14th consecutive quarter of adding bitcoin to its balance sheet.

Don’t get the wrong idea. While MicroStrategy seeks to amass a vast quantity of bitcoins, the company also understands the importance of maintaining a strong cash position. Thus, MicroStrategy rapidly grew its cash and cash equivalents from $46.8 million as of December 31 to $81.3 million as of March 31.

Granted, the company bolstered its cash and cash equivalents through a recent capital raise, issuing $800 million worth of 0.625% convertible senior notes due 2030 in March. That’s not a high interest rate, but investors should still keep in the back of their mind that MicroStrategy will have to repay all of that borrowed capital.

Investors should also note that MicroStrategy’s Subscription Services Revenues grew 22% year over year to $23 million. Hence, the company actually does generate some sales from its enterprise software business. Furthermore, MicroStrategy offers feature-rich software for artificial intelligence (AI) and enterprise-grade analytics.

However, at the end of the day, traders typically consider MicroStrategy as a magnified Bitcoin proxy, and they think of MicroStrategy co-founder and Chairman Michael Saylor as a crypto cheerleader.

There weren’t many folks cheering for MicroStrategy on Tuesday though, as its stock lost 16% of its value as of midday on April 30. Bitcoin was down by about 1% to around $63,000 that day, but clearly, there was more to the story than that.

A steep earnings loss and an accounting anomaly

Let’s try to get to the bottom of why traders dumped MicroStrategy stock. The company’s first-quarter revenue declined 5% year over year to $115.2 million, which fell short of Wall Street’s call for $121.7 million in revenue.

MicroStrategy is volatile, and the quarterly revenue miss was undoubtedly disappointing, but those factors don’t fully account for the deep share-price decline. Thus, let’s turn to MicroStrategy’s bottom-line results.

At first blush, these results might shock and alarm you. In Q1 2024, MicroStrategy recorded an earnings loss of $3.09 per share. This stands in stark contrast to the year-earlier quarter, in which it reported income of $31.79 per share. The company was quick to point out a primary reason for the steep earnings loss, however.

“Digital asset impairment losses of $191.6 million and $18.9 million for the first quarter of 2024 and 2023, respectively, were reflected in these amounts,” MicroStrategy declared in its quarterly press release.

Let’s do the math. MicroStrategy lost $53.1 million in Q1 2024, but this factored in an impairment charge of $191.6 million. If it weren’t for that impairment charge, the company would theoretically have recorded quarterly income of $138.5 million ($191.6 million – $53.1 million).

Thus, if MicroStrategy’s first-quarter impairment charge was a one-time event, maybe the market’s highly negative reaction was overdone and investors ought to forgive MicroStrategy. As Barron’s explained, MicroStrategy chose to use older accounting rules, which explains the quarterly impairment loss.

CoinDesk added, “By the old standard, MicroStrategy at quarter’s end valued its bitcoin holdings at a price of $23,680 each, or $5.1 billion, rather than March’s closing price of $71,028, or $15.2 billion.”

It sounds like this was more of an accounting anomaly than a permanent, non-fixable problem with MicroStrategy. In the final analysis, MicroStrategy stock still has substantial upside potential, but of course, it’s still only appropriate for volatility-tolerant bitcoin bulls.