MicroStrategy: Dangerous Stock, Sell All Rallies (Technical Analysis)

Summary MicroStrategy's Q1 revenues of $115.2 million missed estimates and showed declines in annualized growth rates. The company recorded net losses of $53.1 million, a significant decline from the previous year's net income figure. MicroStrategy saw growth in revenue from subscription services and increased its Bitcoin holdings, but its overall performance reflects weaknesses and investors should be very cautious. The stock has shown historical inabilities to sustain major rallies, and the volatility levels associated with MSTR make this a dangerous stock to hold in conservative portfolios. MicroStrategy (MSTR) is widely known for its seemingly “all-in” Bitcoin ( BTC-USD ) outlook, but recent earnings figures show that the company might have little else to offer investors other than indirect access to the cryptocurrency market. During the first-quarter period, MicroStrategy reported revenues of $115.2 million, which missed analyst estimates of $121.73 million and indicated declines in annualized growth rates of 5.5%. Additionally, the company recorded per-share net losses of $3.09 (or $53.1 million), marking a massive decline from the per-share net income figure of $31.79 (or $461.2 million) that was achieved during the same period last year. Q1 2024 Revenue and Billings (MicroStrategy) Gross margins also dropped to 74% (down from 77.1% a year earlier) and gross profits posted at $85.2 million for the period. Furthermore, impairment losses from digital assets ($191.6 million) caused substantial increases in MicroStrategy’s operating expenses, which rose by an alarming 152.8% on an annualized basis (at $288.9 million). Quarterly Figures (MicoStrategy) On the positive side, MicroStrategy did see growth improvements in its revenue from subscription services, which saw annualized gains of 22% (at $23 million), while cash and equivalents rose from $46.8 million during the prior quarter to $81.3 million. At the same time, digital asset carrying values came in just above $5 billion, affected by nearly $2.5 billion in impairment losses (cumulative). In light of these performance results, MicroStrategy CFO Andrew Kang explained: In the first quarter we raised over $1.5 billion by executing again on our capital markets strategy including two successful convertible debt offerings. We acquired 25,250 additional Bitcoins since the end of the fourth quarter, our 14th consecutive quarter of adding more Bitcoin to our balance sheet. We believe that the combination of our operating structure, Bitcoin strategy, and focus on technology innovation provides a unique opportunity for value creation for our shareholders. Year to date, the price of Bitcoin appreciated significantly, spurred notably by the approval of the spot Bitcoin exchange traded products which has increased institutional demand and resulted in further regulatory clarity. All of that said, our view is that these quarterly performances reflect significant weaknesses within the company as a whole and that investors looking to gain exposure to the cryptocurrency market would be better-off simply buying the cryptocurrencies themselves. Overall, our view of the space remains bullish, and we have written a recent research analysis article on BTC-USD (which can be found here for a more in-depth explanation of our cryptocurrency stance). However, we feel that adding a “middleman” to this equation unnecessarily complicates matters, and when we are seeing a clear deterioration in most quarterly performance results (such as those shown in MicroStrategy’s most recent earnings figures) we think that MSTR must be viewed with extreme caution and should be sold on all rallies. MSTR: Monthly Chart (Income Generator via TradingView) In most of our trading strategies, we tend to believe that market assets will ultimately revert to the mean - at least, at some stage. Looking at the monthly chart shown above, we can see that MSTR share valuations can really only be characterized as extremely volatile. Needless to say, this is the type of stock that has no place in a conservative investment portfolio, as major rallies tend to be very short-lived and vulnerable to sizable selling pressures once they occur. As an example, we can point to the long candle wicks that formed in February 2021 and again in March 2024. In our view, these types of candlestick formations point to extreme volatility, and these scenarios tend to become most obvious during MSTR rallies (rather than declines). MSTR: Weekly Chart (Income Generator via TradingView) On the positive side, we do see some evidence of potential support zones forming in the $1,080 region (although arriving at specific price levels does become much more difficult when dealing with an asset that is characterized by such high levels of volatility). In this instance, we can see that prior areas of resistance will be expected to work as strong levels of support in the future, and we can see a clear example of this type of price behavior in April 2024. Here, MSTR share prices managed to find enough buying activity to prevent sustained declines below the $1,000 level - and this is the main price zone we will be watching going forward. Overall, we would expect declines to accelerate if this support zone is breached to the downside, as this would suggest prior bulls in this region have declined in number. Fibonacci Retracement Levels (Income Generator via TradingView) As long as the aforementioned price support remains intact, we still see scope for additional rallies in MSTR share prices. However, given the stock’s longstanding inability to hold sustainable rallies, we will continue looking for potential resistance levels that can be used to establish short positions (or close pre-existing long positions). To accomplish this, we can use Fibonacci retracement levels as an approach to defining future resistance zones. If we conduct this analysis using the March 2024 price highs of $1,999.70 and extend this move to the May 2024 price lows of $1,009.89, we can see that the 23.6% Fibonacci retracement (located at $1,244.90) and the 38.2% Fibonacci retracement (located at $1,389.19) have already been breached. Thus far, the 50% retracement of the aforementioned price move (located just above $1,500) has contained upside momentum and acted as strong resistance. However, if this level is broken, the next upside targets will become the 61.8% Fibonacci retracement (located near $1,620) and the 78.6% Fibonacci retracement (located just below $1,790 per share). Given recent weaknesses that have become visible in MicroStrategy’s quarterly earnings figures and the long-term inability this stock has experienced in attempting to sustain significant price rallies, we believe that investors should be looking for potential levels to sell MSTR when these types of upside price moves are seen. Currently, we see potential for share prices to continue moving higher as long as our downside pivot point remains intact. However, a downside breach of this area could lead to substantial bearish volatility, as this would suggest that a prior level of strong support would no longer be valid. On the whole, we maintain our positive stance on the cryptocurrency market in broad terms, but we do not see much need for investors to gain exposure to this space using vehicles like MSTR. On its own, the stock’s history of extreme volatility should be viewed as dangerous for investors with conservative portfolio strategies, and we recommend selling this stock during any significant rallies in share prices.