Microstrategy Incorporated

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Microstrategy is a global leader in enterprise analytics and AI software, known for its business intelligence tools, and for its controversial and volatile bitcoin acquisition strategy.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Microstrategy operates in two main business segments: its software business and Bitcoin holdings. Let’s look at each segment closely. Software Business: Microstrategy provides enterprise analytics and business intelligence software solutions. These tools are used by businesses to analyze data, generate reports, and gain insights into their operations and performance. Bitcoin Holdings: The company has adopted bitcoin as its primary treasury reserve asset. It is the largest corporate holder of bitcoin, and has been consistently purchasing bitcoin.

The revenues are primarily derived from subscription services and to a lesser extent, product licenses and support services.

  • Product Licenses and Subscription Services: These are the core offerings of MicroStrategy, including analytics software, data visualization, and cloud-based platform.
  • Product Support: The company also offers training and maintenance to customers.
  • Other Services: The company offers consulting, education, and infrastructure services.

Looking at the recent financial statements from the quarter ending September 2023 (Form 10-Q), it is evident that Microstrategy’s product licenses and subscription revenue declined 4.7% YoY. However, the subscription service revenues themselves continue their impressive growth, increasing by 12.3% YoY. Moreover, from the latest earnings calls it is clearly apparent that the company is transitioning from license based to a cloud subscription model.

The company is actively pivoting towards subscription models, with a decreasing revenue from product licenses. This business transition, although it might cause some volatility in revenue in short term, is essential for long term stability.

The broader software industry, where MicroStrategy operates in, is marked by some important trends:

  • Cloud Adoption: Businesses are increasingly adopting cloud-based software solutions, which allows for more flexibility, scalability, and collaboration.
  • AI Integration: Artificial intelligence (AI) is becoming more important in analytics software, leading companies to incorporate AI capabilities into their products to analyze more data and discover more sophisticated insights.
  • Data Security: With greater focus on privacy and data security, solutions that guarantee control of sensitive information and data will become increasingly important.
  • Data Literacy: The workforce will need to improve it’s understanding on how to analyze data and utilize technology.

Competitive Landscape

Microstrategy competes with giants of the tech industry, which means that companies that have superior sales and marketing budgets and teams and they all try to compete with Microstrategy’s niche.

  1. Tableau (Salesforce): A leading data-visualization tool and is considered among the biggest competitors.
  2. Power BI (Microsoft): A business analytics service that is integrated into the Microsoft ecosystem, and a direct competitor for Microstrategy.
  3. Qlik: A business intelligence software focused on analytics.
  4. Large Cloud Providers (Amazon AWS, Google, Oracle): Large cloud providers continue to add more analytical capabilities into their cloud software offerings, making it harder for other players to compete.
  5. New entrants in the data analytics market: Many companies (startups) are building niche data analytics softwares which may pose a threat to Microstrategy

What Makes Microstrategy Different

The main thing that differentiates Microstrategy from its competition is the company’s bold move to make Bitcoin it’s primary treasury asset, which brings both new opportunities and new risks. MicroStrategy’s main product, their data analytics software, is used by companies for reporting and analysis, and thus the sales are very sticky, and have low customer turnover. Their business model relies heavily on their platform and services offering, and has a small percentage of revenues coming from product licenses.

Moat Assessment: 2/5 (Narrow Moat)

  • Intangible Assets: While MicroStrategy is a well-known name in business intelligence software and analytics, its brand strength and patented technology is not strong enough to give it a wide and durable competitive advantage.
  • Switching Costs: MicroStrategy’s products are complex, and tightly integrated into their clients’ business workflows, it does make it expensive for companies to switch over to other competitors. Therefore, we are able to give this advantage some points.
  • Network Effects and Cost Advantages: The company has little in terms of network effects or cost advantages, so those two sources do not offer any competitive advantage.

Given the above, MicroStrategy has created a narrow moat. This is because its high retention rates and stickiness of its client base provide a layer of protection, but there are no significant barriers to entry in this software industry.

Risks to the Moat and Business Resilience

The main factors that could negatively influence the moat include:

  • Innovation and Market Changes: Technology changes rapidly, and it is a large risk for Microstrategy that new data-analytics softwares and better technologies might overshadow the company and make its product obsolete.
  • Competition: The fierce competition in the data-analytics industry creates lots of uncertainty, especially with tech giants constantly innovating and cutting prices on similar products.
  • Regulation: If the regulatory landscape changes the profitability or usage of Bitcoin, it can negatively affect the company, as a large amount of its finances are tied to Bitcoin holdings.
  • Bitcoin Volatility: Bitcoin price is very volatile and can fluctuate greatly due to different factors like global events, regulations, or market sentiment. Such volatility means that value of Microstrategy can be heavily impacted on any day. This is because MSTR’s business strategy centers around acquisition and holdings of Bitcoin.
  • Debt MSTR has high levels of debt, especially in the form of convertible bonds. The management expects for all of its convertible bonds to be converted into equity, but if the company can not achieve that, their future finances might be negatively impacted.

Microstrategy does have reasonable business resilience though, as a big portion of its revenue stream comes from subscriptions, and thus, it has recurring revenues, however, due to high dependency on Bitcoin, the company is especially vulnerable to risks associated with Bitcoin volatility and large debt repayments.

Financial Analysis

The company’s financial position can be characterized as follows:

Income Statement: The company has experienced increasing total revenues over the past decade. However, this increase has not resulted in a steady increase in the company’s profitability, as profitability is highly dependent on Bitcoin value, and not only its main business of analytics software.

  • Revenues: While subscription revenues have been growing steadily, it has not been enough to compensate for the decline in product license revenues.
  • Margins: The company struggles to have stable operating margins, which are highly dependent on the Bitcoin’s price.
  • Profitability: Net income has fluctuated significantly, heavily affected by changes in Bitcoin values. In the latest quarter, the company posted net loss and their operating income was also negative, signaling a continued struggle to achieve profitability.

Balance Sheet: While the company possesses a decent amount of assets, including its Bitcoin holdings and software, it also faces liabilities including high debt from its convertible bonds.

  • Cash and Equivalents: Microstrategy holds a high amount of cash, but most of it is tied to its Bitcoin holdings, and thus may have limited flexibility with such cash.
  • Assets: The company has some intangible and other digital assets. The valuation of its digital assets is volatile and very speculative.
  • Debt and Liabilities: Microstrategy has a high debt balance, mainly from convertible senior notes, that it is trying to reduce.
  • Equity: The company’s equity has been negatively impacted from its volatile financial performance and Bitcoin price fluctuations.

Cash Flow Statement: There is a large disconnect between the company’s cash from operations and the spending that the company has done on Bitcoin holdings. This discrepancy is a major part of the company’s cash flows, with a great portion of it being used for Bitcoin acquisition.

It is notable that the company has a high debt, and their ability to handle it and continue with its Bitcoin strategy, might be impacted by volatile market and economical factors.

Understandability: 3 / 5

While the nature of the core software business is pretty understandable, the complexity of Microstrategy’s business model as it intertwines its operations with a very volatile cryptocurrency like Bitcoin makes the whole picture a bit difficult to understand.

Balance Sheet Health: 3 / 5

The company has a high degree of liabilities stemming from its convertible bonds and has low liquidity, making its financial stability very fragile. It has a pretty high amount of debt and the company is dependent on Bitcoin price fluctuations. Because of these risks, we can only rate it as average.

Recent Concerns

Microstrategy’s financial health and overall performance is highly tied to Bitcoin, which has lead to big price changes in the share price. For example, a recent change in accounting rules has forced the company to record impairments on its digital assets. This created massive losses on their financial records in the current bear market, which made many investors worried about the direction the company is taking. Moreover, the high debt of the company, especially through convertible bonds, created further unease among investors, as the company may face problems in debt repayment if certain goals are not met. On the positive side, the company does have a well-established business intelligence software and it is constantly growing its sales and subscription business.

Management Response

Microstrategy’s management often reiterates its commitment to Bitcoin and to its long term business goals, including the growth of its core business and acquiring more Bitcoin. The company has been selling its share of stock from time to time to be able to rebalance its debts, and acquire more Bitcoin. However, this means that even if MSTR shares are trading well, the company won’t see the gains on those trades. Management believes that while there may be short-term risks involved with Bitcoin, the long term prospects are extremely good. They believe that Bitcoin will eventually bring very big upside to the company’s finances.

Final Remarks

Microstrategy has made an interesting transformation into a hybrid software and cryptocurrency investment vehicle. While this allows the company to potentially receive outsized gains if Bitcoin does well, it also means that the company is highly risky due to the inherent volatility of Bitcoin and the other business challenges that the company faces in the software sector. Investors should do careful due diligence of the risks, as this is not an investment that is suited for everyone.