MicroStrategy’s Software Business Turns Profitable as Bitcoin Stash Appreciates

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MSTR
A bitcoin investment vehicle owned by a business software company is likely to report its first quarterly profit in two years this afternoon as its business improves and the value of its crypto asset rises.

Its business analytics unit is said to be looking at steady progress in moving clients from on-premises licensing programs to Internet-based recurring subscriptions, known as a software-as-a-service model, which should boost results. To Joe Vafi, Managing Director of Canaccord Genuity. While the business is relatively mature, it is “highly profitable and sticky,” he added.

While fourth-quarter revenue is expected to decline about 3% to $130 million, the company is on track to report net income of $10.7 million after posting a $90 million loss a year ago, according to consensus data compiled by FactSet. The last time it was profitable was in the final quarter of 2020, when it made $2.7 million.

On an adjusted basis used by Wall Street analysts, MicroStrategy expected earnings of 98.3 cents a share, according to Bloomberg data.

As far as investors are concerned, the software business is second only to the company’s bitcoin strategy, which is essentially buying and holding the premium cryptocurrency. Microstrategy sold some for the first time in December, a tax-cutting strategy, but that was offset by purchases in the fourth quarter. It liquidated 704 bitcoins at an average price of $16,776 on Dec. 22, but bought back 810 at $16,845 each two days later, according to an SEC filing. It also revealed that it bought 2,395 tokens at $17,871 each in November and December.

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Brian T. Stoner, a CPA in Los Angeles, calculated that the tax sale is not subject to the whitewash rule, which would deny a deduction for immediate repurchases of securities — potentially generating $770,880 in short-term Capital loss last year. That could be used to offset any capital gains in 2022 or 2023, he said.

After announcing the Q4 deal, MicroStrategy is left with 132,500 bitcoins that were acquired on Dec. 28 at an average price of $30,397 and are now worth nearly $3.2 billion, with the cryptocurrency trading at nearly $24,000 today, All fourth-quarter purchases have been profitable, and the company may want to book some of the December losses on acquisitions made in 2021, when the company paid an average of $49,229, Los Angeles tax lawyer Steven Chung said last year.

Given the stability of its business, MicroStrategy stock tends to trade in line with Bitcoin. The stock topped $500 a share in late March before slumping amid the cryptocurrency sell-off, closing the year at $141.57. It has recovered to $291 as Bitcoin has risen from below $16,000 to its current price.

According to Canaccord Genuity, MicroStrategy not only trades against Bitcoin, but also has a premium on its holdings. Traditionally, this reflects the value of stocks as a proxy for bitcoin, without the need to build crypto wallets and the security risks that cryptocurrencies present, attracting individual investors, the firm said, but it believes institutions are also using stocks for strategies that are more complex than just Buying and holding is more complicated.

Canaccord noted that a buyer called Group One Trading filed a notice with the SEC saying it had acquired a 13.5 percent stake in MicroStrategy common stock. This doesn’t have to be an outright holding, which could be done through derivatives, but it argues that the relatively high open interest in stock options suggests that institutional investors are using the company as a proxy for bitcoin in their trading strategies.