The recent inclusion of MicroStrategy in the NASDAQ 100 tech stocks index brings with it risks – especially on the investor side.
• MicroStrategy new member of the NASDAQ 100
• Dominance of Bitcoin in the company
• Risk for investors and index funds
The NASDAQ Stock Exchange had a Christmas present in store for the software company MicroStrategy: the tech company has been a member of the renowned NASDAQ 100 index since December 23rd. Together with Palantir, MicroStrategy achieved promotion in the last month of 2024.
MicroStrategy meets the requirements – on paper
MicroStrategy had met the requirements for inclusion in the index: at the time of the decision, it was one of the most valuable companies listed on the NASDAQ and also had a corresponding daily trading volume. The company also met another important point: namely the fact that MicroStrategy is not a financial company – financial companies and real estate investment funds are excluded from inclusion in the stock market index. For this reason, the NASDAQ Stock Exchange also gave MicroStrategy companies such as CME Group, Interactive Brokers and Coinbase preference for index inclusion.
How many financial companies are in MicroStrategy?
However, the fact that MicroStrategy has made it into the technology-heavy index due to its classification as a software company worries some observers. In fact, the software business at MicroStrategy has become a minor matter for some time now; in fact, the group has made a name for itself as the largest Bitcoin HODLer in the world at the corporate level. And it was precisely these enormous Bitcoin assets – after all, the US company owned 447,470 pieces of the traditional cryptocurrency on January 6th – that were responsible for the enormous increase in MicroStrategy’s market capitalization and therefore made it possible to be included in the index. “Currently, MicroStrategy should be viewed as a leveraged Bitcoin holding company with a small underlying software company,” MarketWatch quoted David Tawil, president and co-founder of ProChain Capital, as saying.
Mark Palmer, an analyst at Benchmark Co., delved deeper into the topic and determined that with a share price of $650, an estimated $2 was the value of the software business, quantifying the value of the company’s Bitcoin earnings per share According to MarketWatch, it rose to $337 and the value of Bitcoin holdings per share to another $378.
In order to continually increase its Bitcoin reserves, MicroStrategy had repeatedly taken on debt or relied on other financing options.
MicroStrategy shares as a risk?
Against this background, some market observers see MicroStrategy’s inclusion in the index as a risk factor. With the rise to the NASDAQ 100, not only is the trading volume likely to continue to rise, but numerous index funds are also forced to stock up on stocks. So MicroStrategy stock is now in numerous exchange-traded funds. However, this comes with risks for fund investors, because crypto investments – and MicroStrategy is to be classified as such given the dominance of Bitcoin shares in company valuation – are risk assets that also have high volatility.
The index newcomer’s share could therefore cause greater fluctuations, but is particularly exposed to a downside risk. If the Bitcoin price falls, MicroStrategy’s share price is also likely to suffer – just as it had previously benefited from an increase in the price of the cryptocurrency. Investors in index funds that track the NASDAQ 100 would then have losses in their portfolio in the event of a Bitcoin price decline, even though they have not invested in Bitcoin.
In addition, a possible Bitcoin bear market is likely to shake MicroStrategy’s entire business model. The continuous increase in Bitcoin reserves, as CEO Michael Saylor is striving for, is likely to fail due to the financing of these plans – because issuing more shares would then be difficult. Whether MicroStrategy then even has to sell Bitcoins in order to be liquid again is also a possible scenario. This is unlikely to be good for the company’s share price.
Editorial team finanzen.net
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