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MicroStrategy could increase its profits by over $3 billion if it decides to adopt new standards, the report said.
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According to the benchmark, the company will meet the final requirement for inclusion in the S&P 500 if it reports positive earnings.
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This would boost MicroStrategy’s valuation as index funds would be forced to buy the stock, the broker said.
MicroStrategy (MSTR) could surprise Wall Street analysts and post better-than-expected profits if the software company decides to adopt new accounting standards. This means it could qualify for inclusion in America’s main stock index, the S&P 500, broker benchmark said in a research report on Thursday.
The company will announce the results for the First quarter 2024 after the stock market closes on April 29th.
MicroStrategy’s corporate strategy is based in part on acquiring and holding Bitcoin. As of March 19, it held 214,246 Bitcoins worth $13.9 billion at current prices. Benchmark notes that since holding Bitcoin on its balance sheet, the software company has recorded $2.27 billion in cumulative impairment losses due to a Financial Accounting Standards Board (FASB) rule called ASC 350.
The The FASB has issued new guidance A rollout was introduced in December last year that allows companies that hold digital assets on their balance sheet to measure them at fair value and record changes in fair value in net income each reporting period. The new rules come into force on January 1, 2025, but early adoption of the standard is permitted.
“The impact on MSTR’s reported earnings per share would be enormous: The company estimated in its 2023 10-K that an early adoption would increase its retained earnings balance by approximately $3.1 billion beginning in 2024,” analyst Mark wrote Palmer.
Analyst consensus expects MicroStrategy to report a loss per share of $0.55 in the first quarter of 2024. Benchmark estimates that if the company decides to adopt the new standard early, it could report earnings of more than $300 per share for the quarter.
According to the report, MicroStrategy currently meets nearly all of the criteria for inclusion in the S&P 500. The company is based in the United States, its shares are highly liquid, 50% of its outstanding shares are available for trading, and its market capitalization is more than $18 billion -Dollar.
For the index committee to consider a stock for inclusion in the S&P 500, it must also report positive earnings in the most recent quarter. Benchmark notes that MicroStrategy has reported losses in 10 of the last 14 quarters. By adopting the new standards early, the software company could meet this last criterion.
“Inclusion in the S&P 500 would enable MSTR’s stock valuation to receive continued buoyancy through off-price purchases of its shares due to tremendous passive inflows,” Palmer wrote.
Still, uncertainty over the tax impact of adopting the FASB’s updated guidance could cause MicroStrategy to hold off on early adoption, the report continued
Read more: MicroStrategy Should Continue to Rally as Bitcoin Halving Approaches: Benchmark