Shareholders of Strategy would probably like to forget the past six months even happened. The stock dropped 40.2% and now trades at $167.94. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Strategy, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Strategy Will Underperform?
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons there are better opportunities than MSTR and a stock we'd rather own.
Note that our analysis is rooted in fundamentals, not Bitcoin-driven technicals.
1. Weak Billings Point to Soft Demand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Strategy’s billings came in at $196.5 million in Q4, and over the last four quarters, its year-on-year growth averaged 8.3%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers.
2. Shrinking Operating Margin
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.
Looking at the trend in its profitability, Strategy’s operating margin decreased significantly over the last two years. Strategy’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative.
3. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Strategy’s demanding reinvestments have drained its resources over the last year, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 23.6%, meaning it lit $23.56 of cash on fire for every $100 in revenue.
Final Judgment
Strategy doesn’t pass our quality test. After the recent drawdown, the stock trades at 101.5× forward price-to-sales (or $167.94 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward one of our top software and edge computing picks.
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