Key Takeaways
MicroStrategy (MSTR) has transformed into a cryptocurrency titan, leaving behind all the stocks in the S&P 500. The company’s audacious decision to invest heavily in Bitcoin (BTC) has paid off handsomely, resulting in a staggering 1,620% increase in its stock price since 2020.
This performance has not only eclipsed Bitcoin’s gains but has also outshone the top five performers in the S&P 500. And MSTR stock may soon join Wall Street’s largest index.
MicroStrategy has emerged as a shining star in the stock market, primarily due to its bold and unconventional decision to invest heavily in Bitcoin. Since August 2020, the company’s stock (MSTR) has skyrocketed by a staggering 1,620%, far outpacing even Bitcoin’s gains of 426% during the same period.
This extraordinary performance has set MicroStrategy apart from its tech peers, including Tesla, Apple, and Microsoft, which have risen by only 243%. The S&P 500 index has seen a more modest increase of 73%.
MicroStrategy’s strategy has been simple yet effective: hold Bitcoin as a significant portion of its treasury assets. This decision, led by CEO Michael Saylor, has paid off handsomely as Bitcoin’s value has surged in recent years. The company’s early entry into the cryptocurrency market has given it a substantial advantage.
From August 2020 to today, MSTR has outperformed the top five performers in the S&P 500. These stocks include Enphase Energy, which surged by a remarkable 1,400%; Nvidia, which soared by 1,054%; Tesla, up by 928%; Cadence Design Systems, rising by 507%; and KLA Corp, which gained 498%.
Before MicroStrategy’s initial Bitcoin purchase in August 2020, the correlation between its stock price and Bitcoin’s value was negative at minus 0.658. This indicated that the two assets tended to move in opposite directions.
However, after MicroStrategy began accumulating Bitcoin, the correlation turned strongly positive at 0.883, demonstrating a close alignment between the two.
This shift in correlation reflects a change in market perception. MicroStrategy has transitioned from being seen primarily as a software company to being recognized as a major Bitcoin holder and a proxy for Bitcoin investment. Consequently, its stock has become more volatile and sensitive to Bitcoin’s price movements.
Due to its Bitcoin holdings, MicroStrategy’s stock often trades at a premium to its fair value based solely on its software business. This premium reflects investor expectations of future gains from Bitcoin.
The average premium has been around 15.22% over a four-year period. This means that if the fair value of MicroStrategy’s stock based on its software business is $100, the market would likely value it at around $115.22.
MicroStrategy has been impacted by accounting standards that require recognizing unrealized losses on its digital assets. However, a recent change in these standards could substantially boost its earnings.
Under the Financial Accounting Standards Board’s (FASB) new guidance, companies can now measure their digital assets at fair value, recording changes in value directly in net income. This shift could significantly improve MicroStrategy’s reported earnings, as the company estimates a potential increase in retained earnings of approximately $3.1 billion.
Analyst consensus predicts a loss per share for MicroStrategy in the next quarter. However, early adoption of the new accounting standard could result in a significant earnings reversal, potentially reaching over $300 per share.
Another potential benefit of early adoption is inclusion in the S&P 500. MicroStrategy meets many of the index’s criteria, including market capitalization and liquidity. However, its recent history of losses has been a barrier. By adopting the new standard, MicroStrategy could achieve positive earnings and become eligible for inclusion.
Inclusion in the S&P 500 would likely increase demand for MicroStrategy’s stock, potentially driving up its valuation. The company may hesitate to adopt the new standard due to uncertainties about the tax implications.