tl;dr
Strategy, formerly MicroStrategy, faces criticism for comparing its P/E ratio to major S&P 500 firms like Apple and NVIDIA, despite earnings mainly stemming from a one-time market-to-market increase in Bitcoin value. CEO Andy Constan called this misleading, while analyst Lyn Alden expressed disagree...
Strategy, formerly known as MicroStrategy, has come under fire for allegedly misrepresenting its business to investors by comparing its price-to-earnings (P/E) ratio to major S&P 500 firms like Apple and NVIDIA during its second-quarter earnings presentation. Andy Constan, CEO and CIO of Damped Spring Advisors, labeled this comparison as “100% fraudulent,” criticizing the company for implying that its earnings are recurring when, in fact, they stemmed from a one-off market-to-market increase in the value of its Bitcoin holdings. Constan stressed that marketing these gains as recurring earnings deserving of a multiple is deceptive.
Macro analyst Lyn Alden expressed reservations as well, stating she wouldn’t call it outright fraud but does not agree with the P/E comparison charts presented by Strategy. Despite the controversy, Strategy’s shares closed down 4.35% to $372.92 after a slight drop the previous day, maintaining a 33% gain year-to-date but falling 11% from a recent high of $447. Bitcoin’s price, closely tied to Strategy’s fortunes, recently dipped 3.7% to just over $118,000 after hitting an all-time high above $124,000.
The P/E ratio, a core financial metric comparing a company’s share price to its earnings, showed Strategy at 4.7x compared to NVIDIA’s 40.8x as of July 29. Strategy’s CEO, Phong Lee, defended the valuation, claiming the company is “possibly the most misunderstood and undervalued stock” both in the U.S. and globally. Strategy reported an impressive $10 billion profit in Q2, mainly due to accounting for its Bitcoin holdings at fair value following changes in Generally Accepted Accounting Principles (GAAP). However, the revenue from core operations like software subscriptions remained modest at $114.5 million.
Under GAAP, cryptocurrency holdings must now be marked to market, reflecting price changes each quarter, unlike previous rules that only allowed write-downs without mark-ups. Constan warned that this accounting method could produce volatile earnings results, especially if Bitcoin’s market value declines sharply, placing Strategy at risk of severe losses. He further criticized the company’s financial structure, pointing to its issuance of preferred shares to fund Bitcoin purchases, likening the setup to a Ponzi scheme since dividends depend on new share issuance.
Strategy experienced a significant $5.9 billion loss in Q1 after Bitcoin’s price drop, which led to securities fraud lawsuits accusing the company of false and misleading statements about its Bitcoin profit strategy. While Strategy vows to defend itself vigorously, Constan warned that if the company fails, the infamous earnings slide could overshadow all other issues, branding it a lasting symbol of the controversy surrounding Strategy and its bullish executive chairman, Michael Saylor.