Microstrategy and Block Stocks Need Bitcoin to Recover

Both stocks are closely tied to Bitcoin and appear to be challenging the cryptocurrency’s weakness, which recently fell 7.5% to around $29,100. Microstrategy is down 67% this year while Block is down 53%. Both are faring worse than Bitcoin, down 37% year-to-date.

Without a sustained rebound in Bitcoin, the rally in both stocks could be short-lived.

Microstrategy generates almost all of its revenue from a software company, but its main asset is Bitcoin: the company held more than 129,200 tokens on its balance sheet as of March 31. Microstrategy’s bitcoin holdings were worth $5.9 billion at the end of March. This amount has fallen to $3.76 billion at current Bitcoin prices.

The company’s strategy is to issue debt to fund more Bitcoin purchases, but it warned investors about the impact of rising interest rates and falling Bitcoin prices on its finances. “If we are unable to generate sufficient cash flow to service our debt and make necessary capital expenditures, we may be required to sell Bitcoin,” the company said in its first quarter filing.

The stock’s recent declines reflect concerns that Microstrategy could breach debt covenants or be forced to sell some of its Bitcoin holdings if the price continues to fall. The company said it was meeting its commitments as of March 31.

Bitcoin has been sliding for weeks; it’s down more than 30% since April 21, when prices were around $42,000. The crypto is now trading below Microstrategy’s average purchase price of $30,700, according to the company’s first quarter financial report. And the asset value of its bitcoin holdings is approaching the $2.4 billion in debt and loans that Microstrategy carries on its balance sheet.

Most of this debt consists of senior secured notes, at $500 million, plus $1.7 billion in convertible senior notes. The company also took out a loan from

Silvergate Capital

(SI) in the first quarter, worth $205 million and backed by $820 million worth of Bitcoin at the time of issuance.

Microstrategy reports that its annual interest costs are just $44 million. The company generated operating profit of $28 million in the first quarter and $22 million in the fourth quarter of 2021. The company has $95 million of cash on its balance sheet.

“We have enough liquidity from the cash flow generated from the software business to cover interest costs,” Shirish Jajodia, head of investor relations, said in an interview earlier this week with Barrons.

Bitcoin would need to trade around $21,000 for the company to face a margin call, Chief Financial Officer Phong Le said during the company’s latest earnings call.

CEO Michal Saylor also weighed in with a Tweeter May 10. “MicroStrategy has a term loan of $205 million and must retain $410 million as collateral,” he wrote. The company has 115,109 Bitcoins, which it can pledge, he added. And if Bitcoin’s price “falls below $3,562, the company may post further collateral.”

Block, on the other hand, is primarily a payment app consisting of a “Vendor” activity for merchants and Cash App for peer-to-peer payments. But CEO Jack Dorsey, a Bitcoin supporter, bought Bitcoin for Block’s corporate cash and expanded Cash App to include Bitcoin trading.

This effectively turned Block into an equity derivative of Bitcoin. And that weighed heavily on the stock, sending it plummeting for months. Block did not immediately respond to a request for comment.

Some analysts are now urging Dorsey to rethink his Bitcoin strategy.

“SQ’s over-association with Bitcoin is a disgrace,” Mizuho analyst Dan Dolev said in a note Thursday. “Tagging SQ as a ‘crypto stock’ has prevented the stock from benefiting from strengthening fundamentals,” he added, including accelerating gross profits from its Cash App and Seller ecosystems.

Block should “decouple” from Bitcoin, he added, noting that it represents less than 5% of gross profit. The analyst maintained a buy rating, but “painfully” cut his target on the stock to $135 from $215, reflecting lower estimates for gross earnings and a lower market multiple.

Write to Daren Fonda at [email protected]