MicroStrategy's Accounting Problem For Bitcoin Poses Profit Conundrum - Analyst Lays Out Answers

Benchmark analyst Mark Palmer reiterated MicroStrategy Inc MSTR with a Buy and a $1875 price target.

Since adopting its bitcoin acquisition strategy in August 2020, MicroStrategy has seen its share price increase by more than 10x, a performance that during that span significantly outpaced the returns of bitcoin, the major stock indices, commodities such as gold, and big tech stocks, Palmer said. 

At the same time, MSTR, since it started to hold bitcoin on its balance sheet, recorded $2.269 billion in cumulative impairment losses due to a Financial Accounting Standards Board (FASB) rule (ASC 350) that has required the company to account for its bitcoin holdings as indefinite-lived intangible assets, and to treat any decline in their carrying value during a given quarter due to a drop in bitcoin’s price as an impairment loss, the analyst stated. 

Also Read: MicroStrategy’s Winning Streak: How Bitcoin Holdings Sparked a $1.92B Blow to Short Sellers

Under ASC 350, MSTR and other firms that hold bitcoin on their balance sheets cannot reverse those impairment losses in subsequent quarters if the price of bitcoin increases, the analyst said. 

As such, MSTR’s unadjusted earnings got a hit during quarters when its bitcoin holdings lost value, with no offsetting gains during quarters when they increased in value. 

MSTR Executive Chairman Michael Saylor described this cost-less-impairment model as “punitive,” and the company loudly advocated for FASB to adopt new accounting guidance that would enable it to reflect the value of its bitcoin holdings better, the analyst highlighted. 

That new guidance emerged on December 13, 2023, when FASB issued ASU 202308. 

This standard requires companies that hold certain crypto assets (including bitcoin) on their balance sheets to measure them at fair value, with period-over-period changes in fair value recorded in net income in each reporting period, Palmer said. 

Bitcoin holding firms that adopt the new standard can recognize both gains and losses on their holdings. 

While ASU 2023-08 is effective as of January 1, 2025, early adoption of the standard is allowed in the interim, provided that the firms adopting it do so as of the beginning of their fiscal year, including the interim period. 

A few dozen bitcoin-holding companies have adopted ASU 2023-08 early. 

With MSTR scheduled to release its first-quarter 2024 report after the market close on Monday, April 29, investors are divided on whether the company will also choose early adoption. 

The impact of doing so on MSTR’s reported earnings per share would be massive: the company, in its 2023 10-K report, estimated that early adoption would increase its 2024 beginning retained earnings balance by ~$3.1 billion, Palmer said.  

While the Street estimates that MSTR will report a first-quarter 2024 loss per share of $(0.55) (Palmer’s estimate calls for a loss per share of $(0.46)), he estimates that the company could report a gain of more than $300 per share during the quarter by electing early adoption of the standard. 

However, Palmer noted that the tax implications associated with adoption could cause MSTR to hold off on electing that option.

MicroStrategy stock gained 327% in the last 12 months. Investors can gain exposure to the stock via First Trust SkyBridge Crypto Industry And Digital Economy ETF CRPT and Advisor Managed Portfolios Miller Value Partners Appreciation ETF MVPA.

Price Action: MSTR shares traded lower by 1.24% at $1,249.95 on the last check Thursday.

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