MicroStrategy Cash Flow Raises Some Eyebrows Amid Bitcoin Rally

(Bloomberg) — Analysts are starting to look more closely than ever at the enterprise software business underlying Bitcoin proxy MicroStrategy Inc.

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How to best invest cash released from operations is what led co-founder and Chairman Michael Saylor to turn to Bitcoin four years ago. Since then, the Tysons Corner, Virginia-based company has adopted a two-pronged strategy of investing in the cryptocurrency instead of traditional assets like short-term Treasury bonds and growing its software operations.

While MicroStrategy’s Bitcoin holdings have grown to nearly $15 billion in the past few years, making it the largest institutional holder of the digital asset, revenue from its software business has stagnated. Revenue is forecast to be little changed when the company reports second-quarter results on Thursday.

“To me, the real question is making sure that their cash flows are sufficient to cover the incremental interest expense associated with the convertible debt that they’ve issued,” says Lance Vitanza, an analyst at TD Cowen, who has a “buy” recommendation on MicroStrategy shares. “If my estimates are correct, they don’t have much room to make mistakes if their software business underperforms.”

MicroStrategy has used a variety of methods to raise money to buy Bitcoin in addition to its operating cash flow, for example issuing more than $2 billion in convertible bonds this year. Revenue from its software business is used to pay taxes as well as related interest expenses.

The company has about $45 million in interest expenses this year, plus about $20 million in cash taxes and about $82 million in earnings before taxes, Vitanza estimates. Given tight cash flow conditions, Vitanza expects the company to hold off on issuing additional notes to buy more Bitcoin until next year. Despite the company’s Bitcoin holdings nearly doubling in value, the tokens aren’t contributing to the top or bottom line because they don’t generate any revenue.

That hasn’t been much of a concern for most investors so far. The company’s shares are up 156% this year, outpacing the roughly 50% jump in Bitcoin’s price over the same period.

Analysts polled by Bloomberg expect MicroStrategy to have a quarterly loss of 78 cents per share and little changed on revenue of $119.3 million. It earned $1.68 per share in the same period a year earlier. The company is also likely to post an impairment charge on its bitcoin holdings, enough to have been unprofitable in 12 of the 16 quarters it has been buying bitcoin, according to Bloomberg calculations.

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Even if its software business stumbles, MicroStrategy still has plenty of options to keep paying its bills. None of its debt matures until 2027 or later. It could issue another convertible bond, take out a loan, issue more stock, or even sell Bitcoin to raise funds.

“If they need cash, they’ll have to sell; right now, it’s mainly to pay off debt,” said Austin Campbell, an assistant professor at Columbia Business School.

Cash flow could also be affected by an accounting change next year that will require MicroStrategy to mark-to-market its digital assets. The company could be required to pay a 15% corporate alternative minimum tax if its average annual adjusted financial statement income exceeds $1 billion for any three consecutive tax-year periods preceding the tax year, according to a filing by the company.

With the adoption of the rule, “for example, if we experience significant unrealized gains on our Bitcoin holdings, we may be subject to the alternative minimum tax,” MicroStrategy said in the filing. “If we become subject to these new taxes under our IRA for this or any other reason, it could materially impact our financial results, including our earnings and cash flows, and our financial condition.”

“The likelihood of MicroStrategy or Michael Saylor selling their Bitcoin holdings appears very low if Michael Saylor’s public statements prove true,” said Jacob Joseph, an analyst at research firm CCData. “Saylor, a prominent proponent of the Bitcoin HODLing movement, has consistently made optimistic predictions for Bitcoin’s future value.”

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