Shares of MicroStrategy (MSTR) opened higher on August 3 as investors digested the news of CEO Michael Saylor’s departure following a dismal quarterly earnings report.
On the daily chart, MSTR price rose nearly 14.5% to $324.55 per share, the highest level since May 6.
The stock’s intraday gains were part of a broader rally that began on May 12 at $134. Since then, MSTR has risen 142% versus the Nasdaq’s 26.81% gain in the same period.
Bad second quarter, Saylor resigns
MSTR’s rise on August 3 came a day after MicroStrategy reported a $1 billion loss on its second quarter (Q2) earnings call.. Interestingly, the company’s large exposure to Bitcoin was one of the main reasons for its poor quarterly performance.
To recap: MicroStrategy is an information technology company that provides business intelligence, mobile software, and cloud-based services. But one of their main corporate strategies is to invest in Bitcoin to hold it for the long term.
Sadly, holding Bitcoin has cost MicroStrategy a $917.84 million impairment loss on its 129,698 BTC holdings in Q2, mainly due to the cryptocurrency price falling by 50% so far this year. By comparison, MSTR plummeted 42% in the same period.
Additionally, MicroStrategy revenue fell 2.6% year over year to $122.07 million. The quarterly net losses prompted Saylor – who has been a staunch supporter of the Bitcoin investment strategy since August 2020 – to step down as CEO of the firm and become executive chairman.
MSTR responded positively to Saylor’s resignation and the appointment of Phong Le, president of MicroStrategy, as his replacement, suggesting that investors are comfortable with the change in leadership.
What’s next for MSTR?
The course of MSTR for the rest of 2022 is highly dependent on the performance of Bitcoin, given its consistent positive correlation in recent years. But several metrics are hinting at a correction ahead.
For example, MicroStrategy’s enterprise value/revenue (EV/R) ratio was at 10.76 on August 3, or in “overvalued” territory.
Similarly, MSTR’s forward P/E ratio has reached 54.95, more than double the market average of 20-25. In other words, the market expects MicroStrategy to show tremendous future earnings growth despite its underperformance in recent quarters.
MicroStrategy has also racked up $2.4 billion in long-term debt with $46.6 million in interest expense.. Therefore, the company could be unable to meet its debt obligations if it continues to suffer losses at the current rate.
In other words, MicroStrategy could pledge its nearly $2 billion worth of Bitcoin holdings as collateral or sell it to raise capital.
“Nevertheless, Cryptocurrency and MSTR Bulls Can Continue to Invest”Seeking Alpha contributor Juxtaposed Ideas noted in his latest analysis, stating that most are willing to “bet on Bitcoin eventually rallying to $40,000” or higher by 2023 or 2024.
“That would be a positive catalyst for his future stock recovery, returning some much-needed capital to the highly volatile investment.”
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