MicroStrategy, a business intelligence company that owns more bitcoin than any other publicly traded firm, has seen its stock price soar in the past year as the cryptocurrency market boomed. However, a recent analysis by Morningstar suggests that the company’s shares are overvalued by 26%, based on its fundamentals and growth prospects.
According to Morningstar, MicroStrategy’s fair value estimate is $434 per share, while its current market price is $587 as of December 28, 2023. The analyst firm argues that the company’s core software business is facing stiff competition and slowing growth, and that its bitcoin holdings are not enough to justify its high valuation.
MicroStrategy has accumulated more than 120,000 bitcoins since August 2020, worth about $7.2 billion at current prices. The company has adopted a bullish stance on the cryptocurrency, claiming that it is a superior store of value and a hedge against inflation. However, Morningstar warns that bitcoin is a highly volatile and speculative asset, and that MicroStrategy’s exposure to it poses significant risks to its shareholders.
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“While we applaud management’s foresight in recognizing bitcoin’s potential as an alternative asset class, we think the company’s bitcoin strategy is more of a double-edged sword,” Morningstar wrote in its report. “On one hand, it has the potential to generate outsized returns if bitcoin prices continue to rise.
On the other hand, it also exposes the company to considerable downside risk if bitcoin prices fall or if regulators take a more hostile stance toward the cryptocurrency.”
Morningstar also notes that MicroStrategy’s bitcoin holdings are not generating any cash flow for the company, unlike its software business, which provides cloud-based analytics and mobility solutions to enterprises. The firm estimates that MicroStrategy’s software revenue will grow at a compound annual rate of 2% over the next five years, below the industry average of 8%.
Moreover, the firm expects MicroStrategy’s operating margin to decline from 19% in 2023 to 16% in 2027, due to increased competition and higher costs. “We think MicroStrategy’s software business is facing significant headwinds from larger and more innovative rivals such as Microsoft, Salesforce, and Tableau,” Morningstar wrote. “We also think the company’s heavy investment in bitcoin will limit its ability to invest in its core business and expand its product offerings.”
Morningstar concludes that MicroStrategy’s stock is not a good investment for long-term investors who are looking for steady and sustainable growth. The firm advises investors to be cautious about the company’s bitcoin strategy and to look for other opportunities in the software sector.
“MicroStrategy’s stock is trading at a premium to its fair value estimate, implying that the market is overly optimistic about its future prospects,” Morningstar wrote. “We think investors should avoid this stock until it trades at a more reasonable valuation or until the company demonstrates a more balanced approach to its bitcoin strategy.”
Total Cryptocurrency Market Capitalization is attributed to Altcoins
One of the indicators that can help traders identify potential turning points in the cryptocurrency market is the sentiment analysis. Sentiment analysis is the process of measuring the emotional and psychological state of the market participants based on their actions, words, and opinions. By gauging the mood of the market, traders can anticipate the shifts in supply and demand that drive the price movements.
One of the ways to measure the sentiment in the cryptocurrency market is to look at the relative performance of altcoins versus Bitcoin. Altcoins are the alternative cryptocurrencies that are not Bitcoin, such as Ethereum, Litecoin, Cardano, and many others. Altcoins tend to have higher volatility and lower liquidity than Bitcoin, which makes them more sensitive to the changes in market sentiment.
When the market is in a bullish phase, altcoins tend to outperform Bitcoin, as investors seek higher returns and diversify their portfolios. This is often reflected in the increase of the altcoin market dominance, which is the percentage of the total cryptocurrency market capitalization that is attributed to altcoins.
A rising altcoin dominance indicates that more money is flowing into altcoins than into Bitcoin, which implies a positive sentiment towards the cryptocurrency market as a whole.
However, when the altcoin dominance reaches extreme levels, it can also signal a warning sign that the market is overheated and due for a correction. This is because excessive optimism and greed can lead to irrational exuberance and overvaluation of altcoins, which creates a bubble that can burst at any time.
When this happens, investors tend to panic and sell their altcoins, causing a sharp decline in their prices and market dominance. This triggers a negative feedback loop that can drag down the entire cryptocurrency market.
Therefore, traders may want to watch for extreme bullish sentiment in altcoins as it often presages interim market tops. By monitoring the altcoin dominance and other sentiment indicators, such as social media activity, Google trends, and fear and greed index, traders can spot the signs of euphoria and irrationality in the market and adjust their positions accordingly.
By doing so, they can avoid buying at the peak and selling at the bottom, and instead capitalize on the opportunities that arise from the market cycles.
The fear and greed index are one of the sentiment indicators that measures how fearful or greedy the cryptocurrency investors are at any given time. It is based on a scale from 0 to 100, where 0 means extreme fear and 100 means extreme greed.
The index is calculated by using various factors, such as volatility, trading volume, social media mentions, surveys, and dominance. The idea behind this index is that when investors are too fearful, they are likely to sell their coins at low prices, creating a buying opportunity for others.
Conversely, when investors are too greedy, they are likely to buy more coins at high prices, creating a selling opportunity for others. Therefore, by following this index, traders can identify when the market sentiment is too extreme and act against it.