MicroStrategy Inc. (MSTR, Financial) shares advanced more than 26% on Monday as cryptocurrency prices extended gains. Bitcoin added to last week’s gains to soar 20%, at the time of writing as crypto prices continued to bounce back.
As of June, MicroStrategy held over 100,000 bitcoins, with a current market value of almost $3.8 billion. The figure represents more than 60% of the company’s market capitalization of about $6.2 billion. Therefore, as the bitcoin price rises, the cloud service software provider’s stock price could go higher.
Why buy MicroStrategy shares?
From a valuation perspective, MicroStrategy shares trade at a relatively steep forward 12-month price-earnings ratio of 101.74, making it too expensive for value investors.
Its stock movement mirrors the bitcoin price, with the pioneer cryptocurrency accounting for almost 60% of its market capitalization.
Therefore, some investors will be looking at the performance of cryptocurrency prices more than the company's revenue and earnings from its cloud service software business.
Based on the historical performance, bitcoin’s current rebound suggests there could be more to come before making a significant pullback.
Why short MicroStrategy?
Although MicroStrategy shares pulled back 7% on Tuesday, the stock still looks substantially overvalued based on the Peter Lynch fair valuation.
Therefore, it could be time to consider shorting its shares. However, shorting a stock strongly linked to bitcoin just two days before the company reports earnings may not be the best idea as it may be too volatile.
Therefore, it may be best to wait for the earnings report to see how the company performs. For those looking to reduce their stake in MicroStrategy before then, it may not be too late to sell.
Bottom line
In summary, MicroStrategy shares soared more than 40% between last Tuesday and Monday. The rally pushed the company’s forward price-earnings ratio higher, making it less attractive to value investors.
This creates a perfect opportunity for investors who own the stock to trim their holdings. However, it may not be time for investors looking to short MicroStrategy shares, given its upcoming earnings report on Thursday.
