MicroStrategy's Bitcoin Move

Hi investors, my name is Vineet Bhagwani, investment analyst here at LeftBrain. Today's report is a First Focus covering MicroStrategy. Here at LeftBrain Investment Research, we evaluate securities through the left-brain lens and focus on qualities of business that point to long-term financial returns, such as revenue growth and margin trajectory, uniqueness of the product, vision, competitive positioning, addressable markets, and the quality of the management team. So let's dive in and see if MicroStrategy fits the left-brain profile. MicroStrategy provides analytics and business intelligence, or ABI, software solutions to companies across a diverse range of industries, as well as to government enterprises in 27 countries. Its flagship intelligence platform provides a modern analytics experience to users and is considered as one of the most comprehensive ABI platforms on which data connectivity, data visualization, and advanced analytics is supplemented by complementary mobile cloud, embedded, and identity analytics products. The company is considered a pioneer in the API software space but has not really been able to carve a niche for itself as a result of hesitation in timely mapping its products to the market's requirements. For example, the increased need for more flexible job environments shifted large workloads of companies to the cloud, resulting in high demand for cloud-based API solutions. Despite offering a cloud solution since 2014, MicroStrategy continued to focus on its traditional licensed software model instead of developing a marketing strategy for its cloud resources and has suffered as a result. The company's revenues have consistently declined since 2015. In fact, the average yearly decline in its core product licensing revenue is as high as 6%. It continues to maintain industry-leading gross margins, but operating margins have remained subdued. However, its cost optimization measures in the past couple of years has resulted in an improvement in the operating margins for 2020. Let's now assess its addressable market opportunity. As per IDC, the end-user query reporting and analysis software market, which is a part of the overall business intelligence software market, was worth $13.6 billion in 2019. With cloud becoming the foundational infrastructure for many organizations, it is expected to drive a large part of the market's growth going forward. MicroStrategy believes it is well positioned to take advantage of this cloud-led market growth, particularly as it scales its cloud offerings. But historically, it had a weak competitive positioning in the market, competing against the major IT conglomerates such as IBM, Microsoft, Oracle, Salesforce, and SAP. We would hence like to see MicroStrategy execute on its recently adopted cloud-first strategy to grow its market share, but are not too optimistic here. The company is led by its founder, Michael Saylor, He is a majority shareholder of MicroStrategy and so maintains a personal stake in the company's success.

We at LBIR like that quality in a CEO.

Being a strong proponent of the Bitcoin, in August of 2020, Saylor led MicroStrategy to adopt a new treasury reserve policy under which the company's excess cash will be invested in Bitcoin. He described the decision to buy Bitcoin as a way of putting the extra capital for more productive uses. However, the company soon diverted from the original policy and raised external funds to acquire more bitcoins. We think the company's policy of using excess cash to invest in Bitcoin reflects a lack of other fundamental growth investment opportunities.

We also believe the over-aggressive approach toward the Bitcoin adds incremental risks to the company, including the possibility of a focus shift off its core operations.

Now that we have reviewed what the company is doing, let's take a look at the stock's Valuation. MicroStrategy's stock price is almost perfectly correlated with Bitcoin's price, as the company's Bitcoin investment represents just under half of its market value. The surge in Bitcoin's price has caused the stock to rise by over 500% since the company started buying Bitcoins about 6 months ago. This has resulted in significantly expanded valuation of over 18 times its price-to-trailing 12-month sales. So what does all this mean for MicroStrategy stock? MicroStrategy's lackluster financial performance over the past few years Its weak competitive positioning and, critically, the absence of a significant fundamental growth catalyst makes us believe that an investment in MicroStrategy stock at such expanded valuations constitutes a high risk. We like the fact that the management's interest is strongly aligned with that of the company, but MicroStrategy does not overall fit into the left-brain investment philosophy.

With the long term in mind, we are giving it a red light rate.

Noting the risk, there is an interesting opportunity for investors who are looking for accessible Bitcoin exposure, as they can have a stake in Bitcoin without its $50,000+ price tag. With more investment insights with a view through the left-brain lens, visit us at leftbrainir.com to like, share, and subscribe. Be a part of our growing community of left-brainers who experience the informed decisions and independent thoughts that power our search for profitable investment opportunities. This is Vineet Beghwani for First Focus from LeftBrain Investment Research. Thanks for watching, and I'll see you soon with more investment highlights.