MicroStrategy in the Nasdaq-100 ?!?

Am I Having A Nightmare? Or Is This Really Happening?

Starting December 23, 2024, MicroStrategy (MSTR) is to be included in the Nasdaq-100 index. This move raises a lot of red flags and is of grave concern on so many levels.

It has implications for the integrity of the index, but more particularly, it has major implications for anyone invested in passive funds.

First, MicroStrategy isn’t exactly your typical company. And its CEO, Michael Saylor? Let’s just say his past is - complicated. Would you trust someone with a history full of controversies and legal troubles? Oh, and would you trust someone who promotes himself on social media with glowing-eyes?

Let's rewind to 2000 - Saylor and two other MicroStrategy executives were charged by the U.S. Securities and Exchange Commission (SEC) for fraudulently reporting the company's financial results for the preceding two years. Saylor settled with the SEC without admitting wrongdoing, paying $350,000 in penalties and a personal disgorgement of $8.3 million.

The stock price had been inflated by hype and false information. When exposed in 2000 this led to a significant decline in MicroStrategy's stock value (see chart below).

Microstrategy Historic Share Price

As Mark Twain once said, history doesn't repeat, but it rhymes. For Microstrategy, with the same CEO and questionable methods, 2024 looks a lot like 2000.

Now fast forward to August 2022 - the Attorney General for the District of Columbia sued Saylor for tax fraud, alleging that he had illegally avoided more than $25 million in D.C. taxes by claiming residency in other jurisdictions (Virginia and Florida) between 2005 and 2021. MicroStrategy was also accused of collaborating with Saylor to facilitate this tax evasion. In June 2024, Saylor settled the dispute by agreeing to pay a $40 million fine.

You should be starting to formulate an opinion of Saylor for yourself.

A Bitcoin Proxy with Sky-High Valuation

MicroStrategy isn’t really a business in the traditional sense - it’s basically a Bitcoin holding company. It doesn’t produce or sell anything except hype. Its value boils down to its Bitcoin holdings, which makes it hard to compare to normal companies that generate sales or profits.

Here’s the kicker: MicroStrategy is valued at a jaw-dropping $88.3 billion, while its net assets were only worth $3.8 billion¹ at its last annual report. That means it’s trading at 24x its last reported book value. It currently reports to having accumulated 439,000 Bitcoin, which last traded at around $100,000 each, so that implies a market value of $44 billion - but much of that is funded with debt, so the net asset value of the company will be less than this number. We therefore know that Microstrategy’s market cap is somewhere between 2x and 24x its true value. What does this mean? If you’re buying MicroStrategy stock for Bitcoin exposure, you’re paying somewhere between double to 24 times what you’d pay if you just bought Bitcoin directly. Think about that for a moment.

It certainly tells us a great deal about the type of people investing in this ‘company’.

Financial Risks Galore

MicroStrategy’s debt-fueled Bitcoin buying spree has spooked a lot of people. If Bitcoin prices drop, the company’s finances could go into a tailspin, dragging investors down with it. The value of Bitcoin doesn't have to fall that much for MicroStrategy to become completely insolvent.

Oh, and the company has been diluting its shareholders like crazy to fund its Bitcoin hoard - the share count jumped 46% in 2023 alone and has doubled since 2020. This whole thing is starting to look uncomfortably like a Ponzi scheme.

So Why Is It in the Nasdaq-100?

The International Organization of Securities Commissions (IOSCO) Principles for Financial Benchmarks state, among other things, "Administrators must have governance structures to protect the integrity of the index".

Has Nasdaq, Inc. failed as an administrator in this regard?

Including MicroStrategy in the Nasdaq-100 is baffling. The index is supposed to feature leading companies from diverse industries, not a Bitcoin proxy with questionable practices.

Worse, passive investment funds tied to the Nasdaq-100, like the popular Invesco QQQ ETF, will now force everyday investors to own a piece of this circus. That’s people’s hard-earned money being funneled into a company whose business model is shaky at best.

This setup is very dangerous for uninformed retail investors - where are the regulators in all this?

And here’s the irony: MicroStrategy's significant holdings in Bitcoin could lead to its reclassification as a financial company. Since the Nasdaq-100 Index excludes financial firms, this reclassification, potentially happening in the March review, could result in MicroStrategy being removed from the index after only three months.

So, does any of this make sense? Not really. But hey, it’s 2024 - we are in the Twighlight Zone!

1. The most recent 10-K annual report filed by MicroStrategy, covering the year ending December 2023, is available here. According to the balance sheet on page 72, the company's net assets were just $2.1 billion at that time. Since then, the value of Bitcoin has risen, and the most recent net asset value I could find was $3.8 billion. While the actual number might be slightly higher, it remains only a fraction of the company’s market capitalization. Ultimately, the precise figures are less important than the broader point being made.