What happened

Shares of MicroStrategy (MSTR 5.58%) fell 25.3% in May 2022, according to data from S&P Global Market Intelligence. The business intelligence expert with a massive investment in Bitcoin (BTC 4.01%) tokens posted disappointing earnings in early May. Bitcoin prices took another deep dive around the same time, amplifying the market pressure on MicroStrategy’s stock.

So what

MicroStrategy’s first-quarter sales fell 3% year over year, stopping at $119 million. On the bottom line, the company reported a net loss of $10.42 per share, compared to earnings of $1.54 per share in the year-ago period. Your average Wall Street analyst expected earnings near $1.41 per share on revenues in the neighborhood of $127 million.

The bulk of MicroStrategy’s net losses consisted of digital asset impairment charges, based on the falling value of the company’s Bitcoin investments. That pricing trend didn’t stop MicroStrategy from adding to its Bitcoin hoard, though. The company took out a term loan to purchase another $216 million in Bitcoin during the first quarter, lifting the balance sheet’s number of tokens from 214,391 to 129,218.

Bitcoin’s sliding prices reflect the lack of a regulatory framework for cryptocurrencies in most countries, including the United States. Many institutional investors won’t invest in Bitcoin and other crypto names until they know how the government will treat these assets. Individual investors look at the modest interest in crypto from big financial institutions, paired with economic challenges such as raging inflation and the continued Russian attack on Ukraine, and conclude that high-risk investments such as Bitcoin might be a bad idea right now.

Image source: Getty Images.

Now what

All of MicroStrategy’s worries point back to Bitcoin, and for good reason. Cryptocurrencies account for 80% of the balance sheet’s total assets, up from 0% in the summer of 2020.

But that’s not the whole story. Without the large and growing cryptocurrency investment, the company’s business intelligence operations are producing modest cash profits amid global market turbulence. Subscription revenues from MicroStrategy’s cloud-based services rose 28% year over year. In other words, MicroStrategy can afford to keep the lights on during an extended period of weak Bitcoin prices. As long as the cryptocurrency gains value in the long run, MicroStrategy will do just fine.

So an investment in MicroStrategy boils down to your long-term confidence in cryptocurrencies. MicroStrategy’s early bet on digital tokens looks like a genius move if you believe that Bitcoin is disrupting financial markets around the world. If, on the other hand, you see no sustainable value in Bitcoin and expect digital currencies to fade away, you’ll be more comfortable far away from MicroStrategy’s shares.