At Wednesday’s closing price of $58,932, the bitcoin holdings of MicroStrategy Inc. (NASDAQ: MSTR) were worth about $5.38 billion. The company’s market cap was around $6.75 billion.
Is MicroStrategy a tracking stock for bitcoin or a company with a business of its own? The answer depends on whom you ask.
On Thursday morning, two brokerages released reports on MicroStrategy that came to quite different conclusions. Jefferies initiated coverage of the stock with a Hold rating and a price target of $700. BTIG initiated coverage of MicroStrategy with a Buy rating and a price target of $850. The stock’s closing price on Wednesday was $678.80.
In the first sentence of its report, Jefferies notes that 66% of MicroStrategy’s enterprise value is based on bitcoin. The remaining 34% of the company’s enterprise value is “fairly valued” at approximately five times 2022 estimated revenue.
In its bull case, Jefferies analysts Brent Thill and Luv Sodha set a price target of $950. That includes a successful transition in the company’s enterprise software business to driving 55% of revenue in 2024 based on subscription billing growth and continued demand for a limited amount of bitcoin. Jefferies sees free cash flow margins rising to more than 25% over the long term. In its bear case, the price target drops to $530 as a result of a focus on bitcoin that limits investment in the core business, bitcoin’s volatility and falling market share.
The Jefferies price target of $700 implies just a 3% upside to Wednesday’s closing price and reflects the analysts’ view on MicroStrategy’s ability to drive top-line growth by mid- to high-single digits. While Jefferies is positive on bitcoin, Thill and Sodha say, “We are waiting for evidence of an inflection in the core business before getting on board.”
An even more optimistic view came out of BTIG Thursday morning. Analysts Mark Palmer and Andrew Harte say that their $850 price target and Buy rating are “based on a sum-of-the-parts analysis in which we combine the value [of] the company’s holdings of Bitcoin and the value of its enterprise analytics software business.” Their valuation assumes that bitcoin reaches a value of $95,000 by the end of 2022.
Using the same bitcoin holdings total that Jefferies used, BTIG comments that “since MSTR added Bitcoin to the company’s balance sheet its stock has appreciated by 449%, while the price of Bitcoin has rallied by 395% and NASDAQ has appreciated by 21%.”
Provided that investors understand how “highly correlated [MicroStrategy stock is] with the price of bitcoin,” BTIG believes that the company “offers equity investors a means through which they can not only gain exposure to the cryptocurrency, but also to an engine – the company’s enterprise analytics software business – that is generating cash that management intends to use to buy Bitcoin.”
MicroStrategy has committed to investing surplus cash (anything more than $50 million) in bitcoin. BTIG’s Palmer and Harte make their position on bitcoin clear:
[W]e view Bitcoin as a form of digital gold: an attractive, non-sovereign store of value at a time when unprecedented levels of global fiscal and monetary stimulus have heightened investors’ concerns about monetary inflation and the debasement of fiat currencies. As such, we believe MSTR’s adoption of Bitcoin as its primary treasury reserve asset represents a rational action aimed at protecting the company’s inherent value in the long run. At the same time, the strategy enables MSTR to capture upside arising from the increased adoption of the cryptocurrency by institutional investors concerned about mounting inflationary pressures.
With MicroStrategy stock trading at 48% below the price level it reached on February 9, the current share price is “an attractive entry point, in our view,” said Palmer and Harte.
The bullish nature of BTIG’s report was winning the day Thursday. MicroStrategy’s stock traded up more than 6.3%, at $721.77 in a 52-week range of $109.39 to $1,315.00. The consensus price target on the stock is just $350.
The $700 Jefferies price target is already in the rear-view mirror, but BTIG’s target has upside potential of about 18%. Meanwhile, bitcoin traded up by just $46 to $58,978.
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