MicroStrategy Inc., led by Michael Saylor, seemingly meets all the requirements for inclusion in the Nasdaq 100 Index. Such a move would likely trigger significant purchases of its shares by the vast network of exchange-traded funds (ETFs) tracking the benchmark, currently valued at approximately $451 billion. However, despite fulfilling the apparent criteria, there’s growing speculation that MicroStrategy might be excluded from the index’s annual reconstitution.
Michael Saylor, CEO of MicroStrategy
The core issue lies in MicroStrategy’s strategic transformation into a leveraged Bitcoin play. While maintaining a small software business, the company’s primary focus has shifted to acquiring and holding substantial Bitcoin reserves. This unconventional approach has raised questions about its suitability among the top 100 Nasdaq companies. As TD Cowen analyst Lance Vitanza points out, an index should faithfully represent the broader stock universe. While advocating for MicroStrategy’s inclusion (he has a “buy” rating on the stock), Vitanza highlights the inherent tension between MicroStrategy’s current form and the traditional understanding of an index constituent.
MicroStrategy’s stock has soared over 500% this year, driven by its aggressive Bitcoin acquisition strategy, which includes multibillion-dollar purchases announced weekly. The company’s Bitcoin holdings now exceed $40 billion in value, thanks to recent all-time highs for the cryptocurrency. However, this contrasts sharply with its underlying software business, which reported a $340 million net loss in the third quarter. Despite this, MicroStrategy boasts a market capitalization nearing $98 billion, positioning it around the 40th largest stock in the potential Nasdaq 100 lineup. This valuation, heavily reliant on its Bitcoin holdings, could be a deciding factor in its index inclusion.
Nasdaq could potentially cite the limited size of MicroStrategy’s operating business as justification for exclusion. However, this argument seems contradictory given the company’s substantial market capitalization. Furthermore, MicroStrategy’s software business provides a crucial advantage. Financial companies are ineligible for the Nasdaq 100. Although self-proclaimed as a “Bitcoin Treasury Company,” MicroStrategy’s software revenue classifies it as a technology company under the Industry Classification Benchmark, making it eligible for the index. However, Bloomberg Intelligence analyst James Seyffart suggests a potential reclassification as a financial stock could occur in March.
Michael Lebowitz, portfolio manager at RIA Advisors, likens MicroStrategy to a commodity or ETF, arguing that without its Bitcoin holdings, it’s “essentially a dead company.” He believes a reclassification as a financial company is warranted next year, emphasizing that the company’s value is almost entirely derived from its Bitcoin holdings and related financial activities.
Despite the debate, inclusion in the Nasdaq 100 could trigger significant passive inflows into MicroStrategy’s shares, potentially boosting its stock price, according to Benchmark analyst Mark Palmer, who also recommends buying the stock. This price increase could further facilitate MicroStrategy’s ambitious plan to raise $42 billion in capital over the next three years for additional Bitcoin purchases. While increased trading volume from index inclusion might not drastically alter liquidity, it would likely attract new investors, as noted by TD’s Vitanza.
Inclusion in the broader S&P 500 Index, however, presents a different challenge. The S&P 500 considers profitability, a potential hurdle for MicroStrategy given its recent net losses. Vitanza suggests that MicroStrategy’s non-traditional operating model might be a greater concern for the S&P 500 than the Nasdaq 100.
The Nasdaq’s historical focus on non-financial companies listed on its exchange, coupled with its recent foray into digital asset products, further complicates the situation. Alongside MicroStrategy, Palantir Technologies Inc. and Axon Enterprise Inc. are also considered potential additions to the Nasdaq 100. The final decision, with changes effective December 23, will significantly impact MicroStrategy’s future and potentially redefine the composition of the Nasdaq 100.
