MicroStrategy Bitcoin Debt At Risk If Cash Flows Don’t Improve

MicroStrategy (NASDAQ: MSTR), the world’s largest corporate holder of Bitcoin, has been lauded for adding a huge Bitcoin pile on its balance sheet along with other companies joining the bandwagon. However, market analysts have started paying closer attention to the company’s underlying software business.

MicroStrategy on Radar

Chairman Michael Saylor set the precedence in September 2020 on how to best invest the cash generated from operations by making the company’s first Bitcoin purchase. Over the past four years, Microstrategy’s BTC stockpile has surged to a massive $15 billion while the revenue from its software business has stagnated, reports Bloomberg.

With the company scheduled to release its second-quarter results later today, August 1, analysts are having little expectations with the revenue pump. Speaking to Bloomberg, Lance Vitanza, an analyst at TD Cowen said:

“For me, I think the big question is just making sure that their cash flows are going to be sufficient to cover the incremental interest expense associated with the convertible debt they’ve issued. If my estimates are right, they don’t have a lot of room for error if their software business underperforms.”

Interestingly, TD Cowen still has a “buy” rating for the MSTR Stock which has outperformed Bitcoin over the past 18 months, with 134% returns since the beginning of 2024.

Interest on Bitcoin Debts Is Rising

Over the last four years, MicroStrategy has used various different means to raise money to buy Bitcoin, apart from using operational cash. This includes issuing over $2 billion of convertible notes.

Furthermore, the company is using the proceeds from its software business to pay for interest-related expenses as well as taxes. TD Cowen analyst Vitanza estimates that the company has over $45 million in interest expenses along with $20 million in other cash expenses, and $82 million in earnings before taxes.

Thus, Vitanza says that amid the tight cash conditions, the company might have to hold off from making additional Bitcoin purchases this year. Although the software firm has doubled its Bitcoin holdings, it doesn’t add up to the company’s bottom since those BTCs don’t generate any income.

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Earnings Expectations

Analysts surveyed by Bloomberg expect the company to report a quarterly loss of 78 cents per share, with revenue remaining steady at $119.3 million. In the same period last year, the company earned $1.68 per share. MicroStrategy will likely incur an impairment charge on its Bitcoin holdings, potentially resulting in an unprofitable outcome for 12 of the 16 quarters since it began purchasing Bitcoin, according to Bloomberg calculations.

Interestingly, none of the company’s debt is maturing until 2027. Thus, Bloomberg notes that even if the company’s software business falters, it has numerous options to meet its financial obligations. To raise funds, the company could issue another convertible bond, secure a loan, issue more shares, or even sell Bitcoin. The BTC price is currently trading 3.20% down at $64,527.

Besides, the accounting change coming in 2025 could also impact MicroStratgy’s cash flow. As per the company filing, it would need to pay a 15% corporate alternative minimum tax if the income from its average annual adjusted financial statement exceeds $1 billion.

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