Market Milestones: What’s Behind the Recent Surge?
The past two years have been a wild ride on Wall Street, with the iconic Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all reaching record-closing highs. But what’s driving this bull market?
Corporate Earnings and AI Hype
Better-than-expected corporate earnings and the excitement surrounding artificial intelligence (AI) have certainly played a role in lifting the broader market higher. However, another key factor is often overlooked: stock-split euphoria.
Stock Splits 101
A stock split allows publicly traded companies to adjust their share price and outstanding share count by the same factor. While this may seem superficial, it can have a significant impact on investor sentiment. Since Walmart kicked off the trend with a 3-for-1 stock split in late February, over a dozen prominent businesses have followed suit.
The Data Speaks
According to Bank of America Global Research, companies that have announced forward splits have vastly outperformed the benchmark S&P 500. In the 12 months following a split announcement, these stocks have gained 25.4% versus 11.9% for the S&P 500.
A Cautionary Tale: MicroStrategy
While some stock-split stocks are worth buying, others are not. One company stands out for all the wrong reasons: MicroStrategy (NASDAQ: MSTR). With a nearly $52 billion market cap, MicroStrategy’s valuation is heavily influenced by its massive Bitcoin holdings.
The Bitcoin Bubble
MicroStrategy is the largest corporate holder of Bitcoin, with a portfolio valued at $18.28 billion. However, its market cap is $51.7 billion, meaning investors are paying a 177.35% premium to the current price of Bitcoin. This valuation gap is unsustainable and suggests a bubble waiting to burst.
Red Flags
MicroStrategy’s aggressive Bitcoin purchases are funded by convertible-debt offerings, resulting in $4.274 billion in aggregate indebtedness and estimated annual interest expenses of $34.6 million. The company’s only revenue-generating segment is its AI enterprise analytics software division, which has stagnant growth and insufficient cash flow to service its debt.
The Verdict
MicroStrategy has all the hallmarks of a bubble about to pop. With its unsustainable valuation, stagnant growth, and heavy debt burden, this stock-split stock is set to plunge. Investors would be wise to exercise caution and avoid getting caught in the coming downturn.
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