Bitcoin’s tumbling price is dragging down MicroStrategy’s stock.
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MicroStrategy , a software and Bitcoin holding company, was tumbling again as the price of the crypto continued to slide.
Shares of MicroStrategy (ticker: MSTR) were down 23% in trading Monday, to around $227 a share. The company held 129,218 Bitcoins on its balance sheet at the end of March, or about $4.1 billion at recent prices of $32,000 per coin. No other publicly traded U.S. operating company holds as much Bitcoin.
MicroStrategy stock is down 58% this year against a 30% slide in Bitcoin. The crypto has been especially weak lately, falling 7% in the past 24 hours.
The stock’s collapse reflects dwindling sentiment for “risk assets” such as tech. It also reflects a slide in Bitcoin and the effect of rising interest rates as the Federal Reserve tightens monetary policy, impacting the debt and loans on MicroStrategy’s books.
Led by CEO Michael Saylor, a relentless Bitcoin bull, MicroStrategy has amassed $2.4 billion in debt and loans, backing the issuance with Bitcoin and using the proceeds largely to buy more of the tokens.
On its earnings call last week, MicroStrategy indicated that it’s nowhere near facing a margin call—or requirements to shore up collateral. The company said it had 95,643 unencumbered Bitcoins, meaning they had not already been pledged as collateral.
Bitcoin would need to trade around $21,000 for the company to face a margin call, said CFO Phong Le. “We have more that we could contribute in the case that we have a lot of downward volatility,” he said.
Still, MicroStrategy has been buying more Bitcoin and taking on more debt, even as the price of Bitcoin has fallen. The company added 4,827 Bitcoins to its total in the first quarter, or $215.5 million at an average cost of $44,645 per coin.
The company also struck a deal with crypto bank Silvergate Capital (SI) for a loan of $205 million, backed by $820 million of Bitcoin at the time of issuance. That loan, maturing in March 2025, bears monthly interest at a floating rate, equal to the 30-day average Secured Overnight Financing Rate (SOFR) plus 3.7%.
That SOFR has soared since the Fed started raising rates. The 30-day SOFR was recently at 0.35071%, up from 0.19235% on April 4.
MicroStrategy said its total annual interest expense was around $44 million.
The company should be able to make its interest payments with cash flow from its software business. Total revenue from software came in at $119.3 million in the first quarter, up 3% in the last 12 months, but down from $134.5 million in the fourth quarter of 2021.
Software brought in $14.5 million of operating income in the first quarter. The company swung to an operating loss of $178 million, however, largely because of accounting charges on its Bitcoin holdings.
Li said the company faced “a more challenging macroeconomic environment due to the war in Ukraine,” and a tough comparison to the fourth quarter. The company is transitioning to a cloud-based sales model and is showing some good momentum in that area, he added.
MicroStrategy says it has plenty of cash from operations to cover its debt obligations.
“We have sufficient liquidity through cash flows generated at the software business to cover interest expense,” said Shirish Jajodia, head of investor relations, in an interview with Barron’s. The software business generates more than double the company’s interest expense in cash flows a year, he said. And the company had $95 million in cash on its balance sheet at the end of the first quarter.
The company could face a margin call only on the loan from Silvergate, he added. It’s required to maintain around $400 million in collateral on the loan but has more than $3 billion in Bitcoin that could back it up.
Still, investors may be growing nervous that MicroStrategy’s strategy of buying more Bitcoin with debt may be running out of steam. And as rates rise, the company will face higher interest expenses.
Some analysts still expressed confidence in the stock. “The software business has been around for years and is highly profitable,” said Canaccord Genuity analyst Joe Vafi in an interview with Barron’s. “I’m not concerned about interest payments.”
Vafi, who has a Buy on the stock, and $453 target, said the company could always sell a few of its coins to make interest payments or shore up collateral in a worst-case scenario. “This stock is highly levered to Bitcoin spot prices,” said. “It will trade up or down with the price of Bitcoin.”
With Bitcoin continuing to slide, however, MicroStrategy can’t seem to find a bottom.
Write to Daren Fonda at [email protected]
