MicroStrategy (MSTR 0.30%) has benefited from a couple of strong bullish waves the past couple of years: cryptocurrency and artificial intelligence (AI). The company has been adding to its Bitcoin holdings and it has also been rolling out AI-powered business intelligence solutions, which it believes can add value for its customers.
Since the beginning of the year, shares of MicroStrategy have soared more than 240%. The stock has been doing especially well in just the past month as news of Federal Reserve interest rate cuts have helped it rally nearly 50%. Lower interest rates will make it easier for MicroStrategy and other companies to obtain funding for their growth initiatives, potentially making them much safer investments in the process.
Is there reason to be optimistic that MicroStrategy stock can continue rallying, or could it be approaching a peak?
MicroStrategy’s business has struggled with both growth and profitability
At its core, MicroStrategy is in the business of providing business intelligence solutions. And unfortunately for investors, that hasn’t proven to be a sound operation. Through the first six months of the year, MicroStrategy has generated $226.7 million in revenue, which was down 6% from the same period last year.
That’s a red flag for investors, particularly as many tech companies involved with AI have experienced surging demand for their products and services. To make matters worse, the company’s bottom line hasn’t been in great shape either. During the first half of 2024, MicroStrategy incurred an operating loss of $404 million versus a loss of just $47 million a year earlier. A big reason for the decline is digital asset impairment losses totaling $371.7 million during the six-month period, which highlights the company’s significant exposure to the crypto market. But even without the impairment losses, MicroStrategy would have remained unprofitable this year.
The stock’s hefty valuation could make it due for a correction
The excitement surrounding Bitcoin and Fed rate cuts has helped MicroStrategy’s stock rally this year, perhaps to unsustainable levels. At a market cap of nearly $45 billion, investors are paying more than 80 times revenue for a piece of the business. At an average analyst price target of less than $213 (it recently traded at about $219), analysts also think the stock may have already hit its near-term peak.
The one big reason the stock can continue to rally is due to its exposure to Bitcoin — as of the end of July, the company was holding 226,500 Bitcoins. Should the cryptocurrency rise more, MicroStrategy’s earnings will get a boost. And with the company being bullish on crypto as a whole, it could ride the coattails from any excitement surrounding Bitcoin. That, however, makes the case for MicroStrategy being more of a speculative buy rather than a good investment on its own merits and fundamentals.
MicroStrategy is a risky stock to own
If you’re buying MicroStrategy stock, you’re taking on a big risk today. Between its high valuation, significant exposure to crypto, and its underwhelming financial performance, there’s a lot that can go wrong for the stock in the near future. It was already a risky stock before its recent surge, and now, at an even higher valuation, there can be even more room for the high-priced stock to fall.
There are much cheaper stocks for investors to consider than MicroStrategy. Although it may appear to be a scorching-hot buy of late, it’s a speculative investment, and it’s one that likely won’t be suitable for the majority of investors given the risk that comes with it.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.