After Skyrocketing Over 3,000% in 5 Years, Can MicroStrategy Stock Continue to Rise Higher?

Key Points

• MicroStrategy is the largest corporate holder of Bitcoin, and it's not even close.

• The company recently reported a mammoth profit due to gains on digital assets.

• Its Bitcoin-buying strategy has been working tremendously well, and other companies may follow suit.

• 10 stocks we like better than Strategy ›

Did you know that in five years, Bitcoin has risen more than 870% in value? It's a staggering return given that the S&P 500 is up just 91% over that same period. That's still a solid return, but it pales in comparison to Bitcoin.

But what may be even more surprising is that a company that has simply been loading up on Bitcoins has been a far better buy than the cryptocurrency itself. MicroStrategy (NASDAQ: MSTR), which now goes by just "Strategy," has climbed a remarkable 3,000% in five years. It hasn't been experiencing huge sales growth or become a top artificial intelligence (AI) company. Instead, it has just been accumulating Bitcoins, and its enthusiasm for the cryptocurrency has made it a red-hot stock for retail investors to buy.

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However, with the company already accumulating such massive gains in a short time frame, is it due for a crash or at least a correction? Or could it still be a good buy today?

Image source: Getty Images.

More companies are following the same blueprint

Strategy's remarkable returns over the years haven't gone unnoticed by other businesses. More companies are also eagerly investing in the top digital currency in the world as they try to appeal to retail investors. Social media stock Trump Media and Technology Group has recently announced it bought $2 billion in Bitcoin. The stock, largely a speculative play, is likely hoping a similar bullishness in crypto sends its valuation soaring. It's now the fifth-largest corporate holder of Bitcoin. Some other notable names that have accumulated significant amounts of Bitcoin include Block and Tesla.

For Strategy, it is still far and away the leader, owning nearly 629,000 Bitcoins as of Aug. 4. The next-largest corporate position belongs to crypto mining company Mara Holdings, which has 50,000 Bitcoins. But the sheer success of Strategy's approach could entice other businesses to do the same and start accumulating significant holdings of Bitcoin as well. If the novelty of Strategy's stock wears off, that could result in less bullishness and excitement, potentially leading to more muted gains for it in the future.

A disconnect with fundamentals could make the stock ripe for a sell-off

Loading up on Bitcoins has enabled Strategy's valuation to grow to a market cap of $110 billion today. It's large enough to now be part of the Nasdaq 100 index, which is made up of the top non-financial stocks on the exchange. (Strategy is technically involved in providing companies with business intelligence and analytics software.) A quick look at some valuation metrics highlights just how egregiously priced the stock has become: Strategy trades at more than 200 times its revenue, and its estimated forward price-to-earnings multiple, which is based on analyst estimates, is over 1,200.

In its most recent quarter, which ended on June 30, Strategy reported a monstrous net income of more than $10 billion despite only generating $115 million in revenue. The boost came, of course, from its position in digital assets. Strategy reported an unrealized gain of over $14 billion during the period, which was offset partly by a nearly $4 billion provision for income taxes. The business has benefited significantly from Bitcoin's rising valuation and the digital currency hitting record levels this year, but with such a large valuation and enormous volatility on its financials, it makes Strategy a highly speculative investment.

Can Strategy's stock still be a good buy?

If Bitcoin continues rallying and Strategy keeps on to its tally of Bitcoins, it wouldn't surprise me to see the crypto stock rise even higher in the future. The temptation may be to think that Bitcoin is destined to continue going higher, but that's by no means a sure thing. Without strong fundamentals to fall back on, Strategy is simply too volatile and risky of an investment to own. It has achieved significant gains in recent years, but that doesn't mean that the stock's future performance will mirror that.

Unless you're a crypto enthusiast with a high tolerance for risk, you're likely better off avoiding Strategy's stock, as it could take you on a roller-coaster ride.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Block, and Tesla. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.