To say MicroStrategy(NASDAQ: MSTR) is a big crypto bull would be a huge understatement. The company has invested heavily in Bitcoin(CRYPTO: BTC) and has continued to add to its position in recent quarters. MicroStrategy is the largest corporate holder of the digital asset today. But that doesn't mean it is content with the status quo.
MicroStrategy recently said it would add even more crypto to its portfolio. Although that may sound like a great move for the business given the digital currency's rapid rise of late, it also means much more risk for investors.
MicroStrategy is raising $42 billion to buy more Bitcoin
Normally when a company announces it's raising cash, it involves a growth strategy for expanding its operations, perhaps even entering new markets. But MicroStrategy, which sells enterprise analytics software, is planning to raise $42 billion not to expand its business, but so that it can add to its Bitcoin holdings.
Half of that funding will come through fixed-income securities while the other half will come from equity. In total, it estimates it will take about three years to raise all the capital. As of Nov. 11, the company had more than 279,000 Bitcoins, which is up from about 189,000 it had at the start of the year.
Why this is a high-risk strategy for the company and the stock
As Bitcoin has increased in value and hit record highs, MicroStrategy's share price has also gotten a significant bump. While the two investments have shown fairly strong correlations in the past, this year, shares of MicroStrategy have taken off.
The danger for investors, however, is that raising capital to acquire a digital asset like Bitcoin can be an extremely risky move. If there's a downturn or a drop in Bitcoin's value, investors could quickly turn bearish on MicroStrategy. In 2022 when Bitcoin declined by 65%, MicroStrategy stock fell by 74%.
MicroStrategy resembles a Bitcoin holding company more than than anything else these days. Although it still generates revenue from its enterprise software, sales declined by more than 10% in the most recent period, which ended on Sept. 30. And the priority is clearly on adding to its Bitcoin tally rather than trying to expand its core operations.
If investors are primarily buying the stock for its crypto strategy, they should understand that MicroStrategy is highly vulnerable to Bitcoin's changing valuation. And by holding a lot of crypto assets, its earnings have fluctuated significantly due to digital asset gains and losses. Last quarter, the company incurred a net loss of $340 million -- more than twice the revenue it generated ($116 million) -- which was mainly due to digital asset impairment losses totaling $412 million.
Instead of MicroStrategy, just buy Bitcoin
If you're bullish on Bitcoin, you may be better off simply holding the digital asset itself or exchange-traded funds rather than Microstrategy shares.
Even MicroStrategy's valuation suggests it trades more like a digital coin than a typical stock -- its forward price-to-earnings ratio is more than 1,200%. However, that's based on analyst projections and given MicroStrategy's choppy and volatile earnings numbers, profitability is far from guaranteed. Even in terms of revenue, the stock's valuation is absurd -- it's trading at more than 145 times trailing-12-month sales.
The company's latest move, to raise money to buy more Bitcoin, is a highly risky one that doesn't do anything to improve its fundamentals. It will only make MicroStrategy even more of a risky and speculative buy than it is today.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
