MicroStrategy stock slips after announcing a new $ 400 million debt increase to buy Bitcoin

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A lackluster balance sheet, excessive debt, and over-indebted exposure to Bitcoin have already seen MicroStrategy stock plummet more than 63% since February. Even so, the business intelligence firm has ignored the risks of its frothy reviews and is now looking to take on more debt and buy Bitcoin with proceeds (BTC).

MicroStrategy announced on June 7th that it “intends to raise an aggregate principal amount of $ 400 million in senior secured notes in a private offering”. […] to purchase additional bitcoins. “The company already holds more than 92,000 BTC, valued at approximately $ 3.31 billion at current exchange rates – nearly 1.5 times its main investment.

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BTC / USD (blue) vs. MSTR (orange) YTD performance. Source: TradingView

The MSTR plunged 2.17% to $ 469.29 per share after the opening bell of the New York Stock Exchange on June 7. At its annual high so far, it changed hands at USD 1,135.

Don’t make any money

In previous statements, MicroStrategy made it clear that it is building a Bitcoin portfolio as an insurance policy against the ongoing devaluation of the world’s major currencies. But with its successive Bitcoin purchases, the company has effectively protected itself from more than just the decline in the US dollar. Here’s a hint: unprofitable business areas.

MicroStrategy’s net income growth slumped 121.90% in 2020. Source: Wall Street Journal

A look at MicroStrategy’s alternative asset holdings also reveals that the company has an excessive bias towards Bitcoin, with real estate accounting for less than 0.2% of total investments.

The latest quarterly report also shows a weaker balance sheet as of March 31, with a debt to equity ratio of 4.55 – a significant debt burden of $ 1.66 billion versus a stock valuation of $ 0.37 billion.

MicroStrategy had $ 2.44 billion in assets as of March, of which Bitcoin accounted for $ 1.947 billion. Source: WSJ

This is especially risky when you factor in Bitcoin’s price volatility. MicroStrategy is not generating enough revenue to service its debt burden and is heavily reliant on Bitcoin’s profits to do so. On top of that, she now plans to raise an additional $ 300 million, although her convertible bonds won’t mature until 2028.

Juan De La Hoz, a closed-end / exchange-traded fund strategist, fears MicroStrategy is in danger of default should Bitcoin fall more than 50% in the future, pointing to the flagship cryptocurrency’s massive declines in 2014 and 2018. The analyst added that MicroStrategy would most likely liquidate its Bitcoin holdings to avoid bankruptcy.

Hoz added that he would not invest in cryptocurrencies through leverage, nor would he invest in a company that did, which pointed to his extremely bearish outlook for MicroStrategy and Bitcoin.

“It’s just too risky, you could lose everything, and I’d rather not take that risk.”

Bitcoin prices sleepwalked on the early morning announcement by MicroStrategy in the US before trading on the NYSE began. The BTC / USD exchange rate continued to trade sideways while holding the support above USD 36,000.