MSTR stock price has plunged to $343, down from a record high of $540, as concerns about its valuation and as the Bitcoin Treasury industry became crowded. This article attempts to identify the most ideal Strategy stock price based on the sum of parts valuation approach.
What is the Sum of Parts Valuation Approach
Stock market investors use different approaches to value companies. The most common approach is to use the price-to-earnings (PE) multiple to do that. This is a common approach that looks at a company’s stock price compared with its earnings.
Another approach is known as the rule of 40, which identifies a company’s value by looking at its revenue growth and its profit margins. This approach is mostly ideal for companies using software-as-a-service (SaaS) like Salesforce and Dropbox.
The sum of parts is one of the best ways to value Strategy because of how its business is structured. Ideally, this approach looks at the two businesses: software and Bitcoin holdings, and then places a value on each of them.
Strategy Bitcoin Holdings
Strategy’s most important business is its Bitcoin holdings, where the company raises money and accumulates Bitcoin. It now holds 632,457 coins valued at over $69 billion. This business is highly volatile as the value depends on the underlying Bitcoin price.
One can therefore value this business with the current Bitcoin price, which is at $110,000, giving its valuation at $69 billion.
Alternatively, one can use a future price of Bitcoin based on analyst’s forecast. The average estimate of where Bitcoin price will be at the end of the year by top companies like Barclays, Bernstein, Benchmark, BTIG, Compass Point, Maxim, and Stifel is $168,000. A surge to the level will bring its Bitcoin holdings to $106 billion.
Strategy Software Business
The other part of Strategy’s business is its core software that provides tools to companies like IAG and the Commonwealth Bank of Australia (CBA).
The most recent results showed that its trailing twelve-month revenue rose to $470 million. Its second-quarter results showed that its subscription services made $40.8 million, while product revenue was $48 million. Strategy’s product support and other services made $52 million and $14 million.
Most analysts place the value of this software business at between $1 billion and $1.5 billion. In this valuation, we will use the upper range.
READ MORE: MSTR Stock Stumbles: Is 160% Yielding MSTY ETF the Smarter Buy?
MSTR Stock Valuation and Ideal Price
The other part of this sum of part valuation is to adjust it for debt and cash. Strategy has over $50.5 million in cash and equivalents, $8.25 billion in debt, and $6.3 billion in preferred stock, including STRC and STRD. This gives it a total of $14.58 billion.
Therefore, adding its assets and then subtracting its debt, the equity value is about $59 billion. Yahoo Finance data shows that it has 307 million diluted shares. Dividing the equity value and the outstanding shares gives a price target of $190, much lower than the current $347.
This valuation assumes Bitcoin price will remain in this range and that its holdings will be stagnant. All these will not happen as the Bitcoin price will always move, and the Strategy will keep buying BTC.
READ MORE: Strategy (MSTR) Stock Could Crash to $283 Amid Bitcoin Decoupling
