a software and bitcoin holding company, was falling again as the price of the crypto continued to decline.
(ticker: MSTR) fell 23% in trading on Monday, to around $227 per share. The company had 129,218 bitcoins on its balance sheet at the end of March, or about $4.1 billion at the recent price of $32,000 per coin. No other publicly traded US mining company holds so much Bitcoin.
MicroStrategy stock is down 58% this year against a 30% drop in Bitcoin. The crypto has been particularly weak lately, dropping 7% in the last 24 hours.
The stock’s slump reflects declining sentiment towards “risky assets” such as technology. It also reflects a decline in Bitcoin and the effect of rising interest rates as the Federal Reserve tightens monetary policy, impacting debt and lending on MicroStrategy’s books.
Led by CEO Michael Saylor, a relentless bitcoin bull, MicroStrategy amassed $2.4 billion in debt and loans, backing the issuance with bitcoin and using the proceeds largely to buy more tokens.
On its earnings call last week, MicroStrategy said it was far from facing a margin call or demands to bolster collateral. The company said it had 95,643 unencumbered bitcoins, meaning they hadn’t been pledged yet.
Bitcoin would need to trade around $21,000 for the company to face a margin call, Chief Financial Officer Phong Le said. “We have more than we could contribute in the event that we have a lot of downside volatility,” he said.
Yet MicroStrategy bought more Bitcoin and took on more debt, even as the price of Bitcoin fell. The company added 4,827 Bitcoins to its Q1 total, or $215.5 million at an average cost of $44,645 per coin.
The company has also struck a deal with a crypto bank
(SI) for a $205 million loan, backed by $820 million worth of Bitcoin at the time of issuance. This loan, maturing in March 2025, bears interest monthly at a variable rate, equal to the 30-day average guaranteed overnight funding rate (SOFR) plus 3.7%.
This SOFR has skyrocketed since the Fed started raising rates. The 30-day SOFR was recently at 0.35071%, down from 0.19235% on April 4.
MicroStrategy said its total annual interest expense was about $44 million.
The company should be able to make its interest payments with the cash flow from its software business. Total software revenue was $119.3 million in the first quarter, up 3% over the last 12 months, but down from $134.5 million in the fourth quarter of 2021.
Software generated operating profit of $14.5 million in the first quarter. However, the company posted an operating loss of $178 million, largely due to accounting fees on its bitcoin holdings.
Li said the company faced “a more difficult macroeconomic environment due to the war in Ukraine” and a difficult comparison with the fourth quarter. The company is transitioning to a cloud-based sales model and is showing good momentum in this area, he added.
MicroStrategy says it has plenty of cash from its operations to cover its debts.
“We have enough liquidity from the cash flow generated from the software business to cover interest costs,” said Shirish Jajodia, head of investor relations, in an interview with barrons. The software business generates more than twice the company’s interest expense in cash flow per 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 just on the Silvergate loan, he added. He is required to maintain around $400 million in collateral on the loan, but has over $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 could run out of steam. And as rates rise, society will face higher interest charges.
Some analysts again expressed confidence in the stock. “The software business has been around for years and is very profitable,” Canaccord Genuity analyst Joe Vafi said in an interview with barrons. “I’m not concerned about interest payments.”
Vafi, which has a buy on the stock and a target of $453, said the company could still sell a few of its coins to make interest payments or consolidate collateral in the worst-case scenario. “This stock is heavily influenced by bitcoin spot prices,” said. “It will move up or down with the Bitcoin price.”
However, with Bitcoin continuing to slide, MicroStrategy does not appear to be finding a bottom.
Write to Daren Fonda at [email protected]