MicroStrategy (MSTR): Buy, Sell, or Hold Post Q1 Earnings?

MicroStrategy currently trades at $433.30 and has been a dream stock for shareholders. It’s returned 3,614% since July 2020, blowing past the S&P 500’s 95.5% gain. The company has also beaten the index over the past six months as its stock price is up 26.6%.

Is now the time to buy MicroStrategy, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think MicroStrategy Will Underperform?

We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons why you should be careful with MSTR and a stock we'd rather own.

Note that our analysis is rooted in fundamentals, not Bitcoin-driven technicals.

1. Declining Billings Reflect Product and Sales Weakness

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

MicroStrategy’s billings came in at $87.8 million in Q1, and it averaged 7.5% year-on-year declines over the last four quarters. This performance was underwhelming and shows the company faced challenges in acquiring and retaining customers. It also suggests there may be increasing competition or market saturation.

2. Cash Burn Ignites Concerns

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

MicroStrategy’s demanding reinvestments have drained its resources over the last year, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 22.8%, meaning it lit $22.79 of cash on fire for every $100 in revenue.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

MicroStrategy burned through $104.7 million of cash over the last year, and its $8.19 billion of debt exceeds the $60.3 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the MicroStrategy’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of MicroStrategy until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

We cheer for all companies solving complex business issues, but in the case of MicroStrategy, we’ll be cheering from the sidelines. With its shares beating the market recently, the stock trades at 238.9× forward price-to-sales (or $433.30 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at one of our top software and edge computing picks.

Stocks We Would Buy Instead of MicroStrategy

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