Short Selling

Hedge Funds Increase Their Short Bets on MicroStrategy

MicroStrategy Inc
(MSTR:US)
12 months:
-66%
Activity:
Bearish
Pattern:
Rising short interest
News:
Q1 results
MicroStrategy Inc
(MSTR:US)
12 months:
-66%
Activity:
Bearish
Pattern:
Rising short interest
News:
Q1 results

Short selling data can be a very effective risk management tool. If a stock has a high level of short interest, there’s usually a very good reason why.

In this report, we are going to look at the short interest data on MicroStrategy Inc (MSTR:US). MicroStrategy is an American technology company that offers an enterprise analytics platform. The company, which is led by CEO Michael Saylor, also has large investments in Bitcoin. It is listed on the Nasdaq and currently has a market cap of $2.4 billion.

MicroStrategy: Short Interest Data

Looking at our short selling data on MicroStrategy, we see several major red flags. The first is that a large percentage of the company’s shares are on loan. At present, 4.5 million MSTR shares are on loan – roughly 48.9% of the free float. This tells us that there’s a high level of bearish sentiment towards the stock right now.

The second red flag is that the number of shares on loan has risen dramatically in recent months. Back at the start of March, just 2.9 million MSTR shares were on loan. Since then, the figure has risen by 66%. This indicates that hedge funds and other sophisticated investors have ramped up their downside bets here. Generally speaking, sharp rises in short selling activity are a very bearish signal.

Why Short Sellers Are Betting Against MicroStrategy Right Now

It’s not hard to see why short sellers are targeting MicroStrategy right now.

For starters, the company’s balance sheet has been hammered by the fall in the price of Bitcoin. As of March 31, 2022, the carrying value of MicroStrategy’s Bitcoin (approx. 129,000 coins) was roughly $2.9 billion – around $1.1 billion below acquisition costs. Since then, the price of Bitcoin has declined substantially, falling from around $45,000 to under $20,000, meaning the company’s losses will be significantly greater.

Secondly, the company has a mountain of debt on its books. As of March 31, long-term debt stood at $2.4 billion. By contrast, stockholders’ equity was just $863,000. In a rising rate environment, this makes the company vulnerable.

Additionally, the company doesn’t appear to have much momentum within its software business. For the three months ended March 31, product licenses and subscription services revenue declined 6% while gross profit fell 7%.

All in all, the company appears to be facing a number of challenges at the moment. Given the high, and rising, level of short interest here, we think caution is warranted towards the stock.

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