MicroStrategy’s Software Business Turns Profitable As Bitcoin Stash Appreciates

MicroStrategy
MSTR
, the bitcoin investment vehicle attached to a business-software company, is likely to report its first quarterly profit in two years in results expected this afternoon as its business improves and the value of its crypto hoard rises.

Steady progress in its business-analytics division, which is seeking to transition customers to recurring, internet-based subscriptions–known as the software-as-a-service model–from on-premise licensed programs, should give a lift to results, according to Joe Vafi, a managing director at Canaccord Genuity. Although the business is relatively mature, it is “very sticky with good margins,” he adds.

Even though Q4 revenue is expected to fall about 3% to $130 million, according to consensus data compiled by FactSet, the company is on track to report net income of $10.7 million after losing $90 million a year earlier. The last time it eked out a profit was the final quarter of 2020, when it earned $2.7 million.

On the adjusted basis used by Wall Street analysts, MicroStrategy is expected to earn 98.3 cents a share, Bloomberg data show.

As far as investors are concerned, the software business plays second fiddle to the company’s bitcoin strategy, which is essentially to buy and hold the senior cryptocurrency. Microstrategy sold some for the first time in December, a tax-reducing strategy that was outweighed by Q4 purchases. It liquidated 704 bitcoins on December 22 at an average price of $16,776 but bought back 810 for $16,845 each two days later, according to an SEC filing. It also revealed it had purchased 2,395 coins in November and December for $17,871 each.

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The tax sale–which is not subject to the wash rules that would deny a deduction for an immediate repurchase of securities–could have generated a short-term capital loss of $770,880, Brian T. Stoner, a certified public accountant in Los Angeles, calculated last year. That could be used to offset any capital gains in 2022 or 2023, he said.

After the announced Q4 transactions, MicroStrategy was left with 132,500 bitcoins, acquired for an average price of $30,397 on December 28 and now worth almost $3.2 billionWith the cryptocurrency trading near $24,000 today, all of the Q4 purchases have become profitable, and the company might be looking to book some of the December losses against acquisitions made in 2021, when it paid an average price of $49,229, Steven Chung, a Los Angeles tax lawyer said last year.

Given the steady nature of its business, MicroStrategy shares tend to trade in line with bitcoin. The stock was above $500 a share late in March, then cratered with the crypto sell-off, closing out the year at $141.57. It has since recovered to $291 as bitcoin rose from below $16,000 to its current price.

Not only does MicroStrategy trade with bitcoin, its holdings command a premium, according to Canaccord Genuity. Traditionally, the firm says, that reflects the stock’s value as a proxy for bitcoin without the bother of establishing a crypto wallet and the security risks that exists for cryptocurrencies, draws for individual investors, but it thinks that institutions are also using the shares for strategies that are more sophisticated than just buy-and-hold.

Canaccord noted that a buyer called Group One Trading filed notice with the SEC that it had acquired a 13.5% stake in MicroStrategy common shares. That is not necessarily direct equity holdings, it could have been achieved via derivatives, but it figures that relatively heavy open interest in options on the stock is a sign that institutional investors are using the company as a proxy for bitcoin in trading tactics.