(Bloomberg) — Michael Saylor’s MicroStrategy Inc. ticks all the boxes for inclusion in the Nasdaq 100 Index, a development that would lead to purchases of the stock by the $451 billion worth of exchange-traded funds around the world that directly track the benchmark.
Most read from Bloomberg
Still, market watchers are keeping in mind the possibility that this will be rejected during the annual index rebalancing on Friday, for one simple reason: MicroStrategy has turned into a levered bet on Bitcoin, tied to a small software company that many say has no business has and is among the 100 most important. shares on the Nasdaq.
“The idea of an index is that it should be a true representation of the entirety of stocks in the universe,” says TD Cowen analyst Lance Vitanza, who has a buy rating on MicroStrategy. “Any major company that makes up a substantial part of the Nasdaq universe should be included in the index.”
Shares of the Tysons Corner, Virginia-based company co-founded by Saylor have mesmerized Wall Street this year by surging more than 500% as the company accelerates an unconventional plan to raise capital solely to acquire more Bitcoin buy and keep. It has announced billion-dollar acquisitions of the cryptocurrency every Monday for the past five weeks.
With the token’s price recently hitting an all-time high, MicroStrategy now owns over $40 billion worth of Bitcoin. But the underlying business posted a net loss of $340 million in the third quarter of this year. Still, the company’s $98 billion market cap, which would make it roughly the 40th largest stock in the Nasdaq 100, is largely based on its Bitcoin buy-and-hold strategy, and this could impact whether it share is added to the Nasdaq 100. .
Nasdaq could use the small size of MicroStrategy’s operations as a reason not to add the company to the index, Vitanza said. However, that would be counterintuitive given the company’s market capitalization is so large, he added.
‘Bitcoin Treasury Company’
MicroStrategy’s software business gives it an advantage when it comes to inclusion in the Nasdaq benchmark, as financial companies are not eligible for the Nasdaq 100. MicroStrategy has called itself a ‘Bitcoin Treasury Company’, but since its revenue comes from the software operations, it is classified as a technology company by the Industry Classification Benchmark, making it fair game for the index. According to Bloomberg Intelligence analyst James Seyffart, the ICB could choose to reclassify MicroStrategy as a financial stock during the next change in March.
Michael Lebowitz, portfolio manager at RIA Advisors, said MicroStrategy now looks more like a commodity or an ETF because it is “essentially a dead company” without its Bitcoin. He believes it should be reclassified as a financial company next year.
“One hundred percent of the value of the company is Bitcoin, because the rest of the company is potentially negative,” Lebowitz said in an interview. “A large majority of the company is just its Bitcoin holdings and the financial machinations surrounding it, so it is a financial company.”
Nevertheless, if it were added to the index, it would “introduce the potential for very large amounts of passive inflows into MicroStrategy stock and could provide a boost to the stock,” according to Benchmark analyst Mark Palmer, who also rated a “buy” recommendation. on stock.
MicroStrategy aims to raise $42 billion in capital from its equity and fixed income offerings over the next three years, and has already surpassed its 2025 equity target. An increase in share price from inclusion in the index would help the company issue shares at premium prices and support its overall strategy to buy more Bitcoin, Palmer said.
The increase in stock trading if the company is added to the index may not make a big difference to liquidity, but it would attract new investors, TD’s Vitanza said.
“If you think about the liquidity of the shares and the volume of shares that are traded, it’s not that much,” Vitanza said. “But they will be new pockets of capital, so I think the people who will end up owning the stocks on the other side of the index are clearly different people buying stocks at market price.
Joining the broader US benchmark, the S&P 500 Index, would be a different story. The S&P 500 takes into account the profitability of new additions to the index, which could pose a barrier for MicroStrategy, which has posted net losses in three of the past four quarters.
“The fact that they are not a traditional operating company in the traditional sense of the way we describe it, I think has a lot more impact on the S&P 500 than it does on the Nasdaq 100,” Vitanza said.
The Nasdaq index has long distinguished itself from the S&P 500 by focusing on non-financial companies, and only on companies listed on Nasdaq. The exchange itself has launched its own digital asset products and provides a software platform to help market crypto exchanges.
Palantir Technologies Inc. and Axon Enterprise Inc. could also be added to the Nasdaq 100, according to Bloomberg Intelligence. Changes to the index will take effect on December 23.
Most read from Bloomberg Businessweek
©2024 BloombergLP
