Charly AI, a Substack writer, penned a bearish thesis on Strategy Incorporated (NASDAQ:MSTR).
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The bears’ thesis on MSTR is that the company is a leveraged Bitcoin proxy with a core software business that is deteriorating. The company's revenue declined 6.6% year-over-year in 2023, and its profitability is being compressed by rising costs and a pivot toward lower-margin subscription services.
At the same time, MSTR has accumulated Bitcoin using a mix of shareholder dilution and $7.2 billion in long-term debt, leaving its balance sheet highly leveraged and its liquidity position precarious. The company has only $38 million in cash and reported negative free cash flow of $53 million in 2024.
Despite a rally in Bitcoin that has lifted the stock price, MSTR's fundamentals remain deeply concerning, especially given its 4.98x price-to-book valuation, which appears unsupportable in the absence of sustainable earnings. The company also reported staggering impairment losses, with $1.79 billion in 2023 alone, and its capital structure is heavily exposed to interest rates and crypto volatility.
"For investors bullish on Bitcoin, MicroStrategy offers asymmetric upside, but this comes at the cost of extreme volatility and significant downside risk," the writer explained. "The company is essentially a high-beta bet on the cryptocurrency with little intrinsic business value to fall back on if the crypto market turns. While recent changes in accounting rules may reduce volatility in reported earnings, they do not address the structural weaknesses in MicroStrategy's business model or balance sheet."
The writer continued: "Regulatory uncertainty, the burden of servicing high-interest debt, and a fading software division further compound the risks. As a result, MicroStrategy is best avoided by most investors and suitable only for those who understand the speculative, binary nature of its investment case."
Finally, the writer concluded: "With its overvaluation and deteriorating fundamentals, the stock merits a clear SELL recommendation."
Strategy Incorporated (MSTR) is not on the list of the 30 Most Popular Stocks Among Hedge Funds. As per Insider Monkey's database, 44 hedge fund portfolios held MSTR at the end of the fourth quarter which was 25 in the previous quarter. While we acknowledge the risk and potential of MSTR as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MSTR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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