micro . strategy
and Block saw some relief on Thursday as their shares headed into positive territory. But the gains may not last if Bitcoin does not improve.
(Stock ticker: MSTR), a business intelligence software company, advanced 1.9% to $171 shortly afterwards, while the payments app
It rose 2.9% to $73.20.
Both stocks are closely related to Bitcoin and appear to be challenging weakness in the cryptocurrency, which recently dropped 7.5% to around $29,100. Microstrategy is down 67% this year while Block is down 53%. Both are the worst performers of Bitcoin, down 37% year-to-date.
Without a sustainable recovery in Bitcoin, the rally in both stocks may be short-lived.
Microstrategy generates nearly all of its revenue from the software business, but its primary asset is Bitcoin: the company held more than 129,200 tokens on its balance sheet as of March 31. Microstrategy’s Bitcoin holdings were valued at $5.9 billion at the end of March. That’s down to $3.76 billion at current bitcoin prices.
The company’s strategy includes issuing bonds to fund more bitcoin purchases, but it cautioned investors about the impact of higher interest rates and lower bitcoin prices on its finances. “If we are not able to generate sufficient cash flow to service our debt and allocate the necessary capital expenditures, we may be required to sell bitcoin,” the company said in its statement for the first quarter.
The stock’s recent declines reflect fears that Microstrategy will breach debt covenants or be forced to sell some of its bitcoin holdings if the price continues to fall. The company said it was sticking to its commitments as of March 31.
Bitcoin has been slipping for weeks; It has fallen more than 30% since April 21, when prices were around $42,000. The cryptocurrency is now trading at less than Microstrategy’s average purchase price of $30,700, according to the company’s first quarter financial report. The value of its bitcoin holdings is close to $2.4 billion in debt and loans that Microstrategy holds on its balance sheet.
Most of that debt consists of high-profile, $500 million secured bonds, plus $1.7 billion of older convertible bonds. The company also took out a loan from
(SI) in the first quarter, valued at $205 million and backed by $820 million in Bitcoin at the time of release.
Microstrategy reports annual interest expense of just $44 million. The company generated $28 million in operating income in the first quarter and $22 million in the fourth quarter of 2021. The company has $95 million in cash on its balance sheet.
Shirish Jagodia, Head of Investor Relations, said in an interview earlier this week with Baron.
CFO Fung Lu said in the company’s latest earnings call that Bitcoin would need to trade around $21,000 for the company to meet the margin call.
CEO Michael Saylor also weighed in with a tweet On May 10, he wrote, “MicroStrategy has a $205 million term loan and needs to keep $410 million as collateral.” He added that the company has 115,109 bitcoins to pledge. And if the bitcoin price drops below $3,562, the company can post some other guarantees.
Block, for its part, is essentially a payments app that consists of a “vendor” business for merchants and a cash app for peer-to-peer payments. But CEO Jack Dorsey, a bitcoin proponent, bought bitcoin for Block’s treasury and expanded the Cash app to include bitcoin trading.
This turned Block into a Bitcoin-derived equity. And it significantly affected the stock, bringing it down for several months. Block did not immediately respond to a request for comment.
Some analysts are now urging Dorsey to rethink his bitcoin strategy.
“SQ’s excessive association with Bitcoin is shameful,” Mizuho analyst Dan Dolev said in a note Thursday. He added, “Marking SQ as a ‘crypto stock’ prevented the stock from benefiting from a fundamental boost,” including accelerating overall earnings in implementing cash and seller ecosystems.
He added that the ban should be “decoupled” from bitcoin, noting that it represents less than 5% of the total profit. The analyst maintained the buy rating, but lowered his “painfully” target for the stock to $135 from $215, reflecting lower estimates for total earnings and a lower market multiple.
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