Because of its cryptocurrency hoarding strategy, MicroStrategy (NASDAQ:MSTR) is now a big deal. It needs a new name to go along with its plus-sized game plan, so it has rebranded as Strategy. It is also incorporating a Bitcoin (CRYPTO:BTC) logo and a new orange color.

Yet the stock remains risky. The so-called Bitcoin Treasury Company is seen as an alternative means of gaining exposure to crypto. After being included in the Nasdaq 100 index due to the run-up in its share price last year, buyers of the index can receive even more tangential exposure to Bitcoin.

However, its underlying financials do not support the plan. Investors face exceptional volatility and ongoing dilution.

A fourth-quarter reshuffle

MicroStrategy, or Strategy, reported fourth-quarter earnings on Wednesday and suffered a dramatic loss of $3.03 per share versus the $0.50 per share loss expected by Wall Street.

The loss was the result of a $1.01 billion impairment charge on the 471,107 bitcoin tokens it holds. Because the crypto is worth more than $45 billion at bitcoin’s current price just above $97,000, it wrote down the difference.

This will readjust in the first quarter, though, as the company shifts to new fair-value accounting standards. Previously, digital assets had to be marked down when prices fell, but couldn’t be adjusted higher if prices rose unless it sold them. The new rules allow adjustments to be made on gains in value, which will see a one-time cumulative adjustment of $12.75 billion t retained earnings as it changes from carrying value to market value. 

However, the changes that allow Strategy to reflect Bitcoin’s fair value will show up on its income statement. That mean unless it gets a waiver from the Treasury Dept., the Bitcoin Treasury Company faces a potential massive tax bill. Because CEO Michael Saylor has said he doesn’t plan to sell any bitcoin to cover the cost, it needs an alternative means of paying the taxes due.

It won’t have enough cash in the bank to do so. At the end of the fourth quarter, cash and equivalents fell to just $38.1 million. 

Saylor called the tax issue a “nuisance” that will slow down its growth rate, but said they will work it out. The company, though, has requested from the IRS relief from the corporate minimum alternative tax. Coinbase Global (NASDAQ:COIN) has requested similar relief.

A new look

The rebranding was seen as necessary because its data analytics business has taken a backseat to buying bitcoin. The software business is rapidly declining and revenue dropped 3% in the quarter to $120.7 million, below expectations of $122.5 million. Subscription revenue plummeted 49% to less than $32 million.

But as Bitcoin is its focus, all of that is immaterial. Strategy increased its share count 10-fold in January and it will use the influx of stock to buy more of the crypto. Moreover, it launched a new perpetual preferred stock, Strike (NASDAQ:STRK), with an 8% dividend to further its ability to purchase more. Strategy owns 2% of the total 21 million supply of the token. 

Because Strategy doesn’t actually have the money to pay the dividend — it needs approximately $58 million a year to make the payout on 7.3 million shares — Saylor says he will be selling stock to cover the cost, and he always has the Bitcoin to fall back on, if necessary.

However, with the first maturity not due until 2028, Strategy has “enough room to lever up” before then.

Key takeaway

Saylor had been on a Bitcoin buying spree ahead of the earnings report. For 12 consecutive weeks, Strategy had purchased bitcoin, often spending billions of dollars to increase its holdings. It paused the frenzied purchases last week, but should resume them once again.

In the fourth quarter, a record 218,887 worth of Bitcoin was purchased at a cost of $20.5 billion. Strategy wants to buy a total of $42 billion worth.

So long as Bitcoin’s value rises, it is a sound strategy. But there is no guarantee that will happen, and the crypto has been known to crash hard. Investors interested in Bitcoin might just want to buy Bitcoin directly.

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