MicroStrategy: Shorts Are Playing With Fire (Technical Analysis)

Summary Citron Research is shorting MicroStrategy, but I believe the stock’s bullish technicals make a sell rating unwarranted; I rate it a hold. Daily and weekly chart analyses show strong uptrends with no resistance, indicating potential for further stock appreciation despite recent pullbacks. Fundamental analysis reveals overvaluation with weak earnings and high P/S and P/B ratios, suggesting long-term risks despite bullish technical signals. Conflicting technical and fundamental signals lead to a hold rating, cautioning shorts about potential near-term bullish momentum before fundamentals reassert. Thesis Citron Research recently announced that they are now shorting MicroStrategy Incorporated ( MSTR ) stock as they believe that it is detached from fundamentals. While I also believe the stock is currently overvalued, in my view, Citron Research is playing with fire by shorting the stock as the technicals are overwhelmingly bullish. In the below analysis, I determine that charts, moving averages, and most indicators show that the stock’s outlook is positive and that the recent pullback is a healthy correction in the long run. Note that a monthly analysis has not been provided, as I believe the 2020 to present period is the most relevant due to MicroStrategy’s implementation of its Bitcoin strategy in 2020. In the fundamentals section, I explain my evaluation that MicroStrategy stock is overvalued using the P/S and P/B ratios as well as trends in their earnings and Bitcoin investments. In the long run, the stock may revert to reflecting the fundamentals and could prove Citron Research to be right. However, before that occurs, history has shown that overvalued stocks can become much more overvalued. With highly bullish technicals, history can easily repeat itself with MicroStrategy stock. With the stock significantly overvalued, I cannot recommend buying it at these levels, but with the technicals so strong, I also believe a sell rating is unwarranted at this juncture. Therefore, I initiate coverage at a hold rating. Daily Analysis Chart Analysis Yahoo Finance The daily chart is quite a positive one for MicroStrategy as there is no resistance above the stock. The stock is in both a slightly longer-term uptrend and a recent accelerated uptrend. It also has many support levels beneath the stock. The nearest current support would be the accelerated uptrend line that has moved past 400 and is sloping up very quickly. Its sustainability could be in question as its trajectory may be too steep. The next support level is also quite close and is in the mid-380s. In the last week or so, that level has been both resistance and support, making it a highly important zone. Moving down, the mid-320s is also support, as there is a consolidation area that found support at that price level. Although quite distant, we also have support in the mid-270s as that was an upside gap and the slower uptrend line is also nearing that level as well. Other noteworthy items include the fact that the stock has closed an upside gap that I have circled, showing that the stock has corrected as of late, and the bearish engulfing pattern at the peak a few days ago, perhaps indicating that a near term peak is in. Nonetheless, it is hard to argue against the overall bullishness of the daily chart as the stock is in strong uptrends with no resistance in sight. Moving Average Analysis Yahoo Finance There have been no crossovers between the 50-day SMA and the 200-day SMA in the past year, with the 50-day SMA staying on top the entire time, indicating sustained bullishness. The 50-day SMA has recently widened the gap significantly with the 200-day SMA, indicating accelerating bullish momentum in the stock. The stock does trade miles above the 50-day SMA, however, as the 50-day SMA’s support is only at around 240. For the Bollinger Bands, the stock recently broke above the upper band, and so the current pullback is not at all surprising. As volatility expands, the upper band may continue to surge higher, creating more room for the stock to run higher without being overbought. The 20-day midline is the nearest MA support at around 320. Overall, I believe that while the stock may be a bit overbought as it is much higher than its 50-day SMA, there are really no outright bearish indications here to convince me that the near term technicals have turned negative. Indicator Analysis Yahoo Finance The MACD crossed above the signal line earlier this month, a bullish signal. The gap between the lines has narrowed a bit, as indicated by the red histogram, showing that bullishness has been receding a bit as of late. This is not surprising given that the stock is currently in an overbought pullback. The MACD’s run to one year highs also confirms the latest surge in the stock. For the RSI, it is currently at 64.39 having just exited the overbought 70 level. The RSI has held above 50 since mid-September, showing that the bulls are in clear control of the stock. Lastly, for the stochastics, the %K just recently crossed below the %D within the overbought 80 zone, a bearish signal. This again is not surprising given that the stock is undergoing an overbought correction. Note that the stochastics has remained above the 50 level since mid-September and has, in fact, found support at that level multiple times. This indicates that the bulls have been resilient in recent pullbacks, and investors should monitor this indicator closely to see if it bounces from this level again. As a whole, I would say that these indicators were mainly positive in the longer term, as the recent bearish indications are merely reflecting the stock’s healthy pullback. Takeaway The short-term technical outlook for MicroStrategy is a strong one, as all three analyses indicate that the stock could run further in the near future. The chart shows that the stock remains in both a slower and an accelerated uptrend, while the MAs show accelerating bullish momentum. Lastly, for the indicators, as discussed above, there were key bullish signals and while there were some near-term bearish signals, they merely reflect the recent healthy pullback in the stock. Weekly Analysis Chart Analysis Yahoo Finance Note that the above chart is in a log scale to better reflect the last few years of trading history in MicroStrategy stock. The weekly chart is also a highly positive one for the stock, as it has now broken above the upper channel line and is in an accelerated uptrend. The upward channel has been in effect since early 2023 and in October this year, the stock broke above it, an indication of strength. The nearest support level would be at a gap in the low 270s. This is basically the same gap as in the daily analysis, but being on the weekly chart further adds to its significance. The next support level would be the upper channel line, and it has just moved past 210. The other two support zones are very distant due to the log scale, but I believe are still noteworthy. The lower channel line is approaching 130 and there is also a support level at 110 as that price level was major resistance in 2021 and is also at an upside gap formed earlier this year, making it a very significant area. Overall, I believe there is not much to complain about here, as there are no bearish indications to be seen. Moving Average Analysis Yahoo Finance The 13-week SMA had a bullish crossover with the 26-week SMA earlier this year where the 13-week SMA just dipped below the 26-week SMA and bounced back very quickly. The gap between the SMAs has expanded rapidly lately as the stock has surged, indicating accelerating bullish momentum. Again, the stock trades far above the SMAs, showing that it could be overbought with the 13-week SMA’s support at only 237. For the Bollinger Bands, the stock remains above the upper band, showing that it is indeed still overbought in the longer term time frame. Therefore, a further pullback in the stock is definitely not out of the question and could, in fact, be healthy for the stock’s long-term trend. The 20-week midline is only at around 206, but its support is nearer than the 26-week SMA. From my analysis, there is nothing wrong with MicroStrategy stock in the long term, even if it continues its recent pullback. The MAs are solidly bullish, and the stock just needs a healthy correction. Indicator Analysis Yahoo Finance The MACD had a bullish crossover with the signal line back in late September, and the stock has surged since then. The gap between the lines continues to expand as demonstrated by the green histogram and again shows accelerating bullish momentum. Like in the daily analysis, the weekly MACD’s run to 5-year highs, confirms the recent surge in the stock. For the RSI, it is currently above the overbought 70 zone as it is at 80.41. There is some slight negative divergence with the RSI here, as the most recent peak fails to surpass the peak earlier this year and the one back in 2021. Since the MACD does confirm the recent run, I believe this divergence signal has less significance and should be taken with a grain of salt. Lastly, for the stochastics, the %K has crossed below %D within the overbought 80 zone in October, a bearish indication. However, both lines have generally remained in or near that zone since the bearish crossover, showing that bullishness has been sustained despite the negative signal. From my analysis, these weekly indicators are slightly more mixed in their signalling as there are both bullish and bearish indications here, but I believe the MACD’s confirmation of the bull run should give investors some peace of mind. Takeaway Overall, I would say that the long-term technical outlook for MicroStrategy is also positive, as the vast majority of signals are bullish. The charts show that the stock has broken out of an upward channel and is now in an accelerated uptrend, while the MAs once again show accelerating bullish momentum. For the indicators, there were mixed signals that show some uncertainty, but as discussed above, I would consider the MACD’s bullish confirmation as the most important signal. Fundamentals & Valuation Earnings Data by YCharts MicroStrategy reported their Q3 earnings back in late October and showed weak operating results. They reported revenues of $116.1 million, down 10.3% YoY and a GAAP Net Loss of $1.72 per share. Both figures missed expectations with revenue missing by $5.38 million and EPS missing by $1.60. As you can see in the charts above, revenue is at weak levels compared to past years and EPS is on a worrying trajectory. Of course, these operational results have taken a back seat as the focus is firmly on the company’s Bitcoin investments. MicroStrategy reported a 5.1% “BTC Yield” KPI in the quarter and projected a target annual BTC Yield of 6-10% from 2025 to 2027. It also announced a $21 billion equity offering at market price and an additional raising of $21 billion from fixed-income securities to fund its Bitcoin investments. As of this report, they are holding 252,220 Bitcoins, translating into a current total market value of $23.5 billion. The company has made significant purchases since then with the most recent purchases occurring last week, where they purchased an additional 55,000 Bitcoins. As of this latest Sunday, they hold 386,700 Bitcoins, translating into a current total market value of $36.1 billion. From the chart above, you can see that the company’s book value has soared in the past two years along with the bull run in Bitcoin itself. Valuation Data by YCharts In my view, it is clear that MicroStrategy is overvalued at current levels. Earnings are now negative, and so a P/E analysis would be irrelevant. The P/S ratio is currently at 167, dropping slightly from its all-time highs of over 180 recently. The P/B ratio is currently at 24 and is at a five-year-high, excluding the 2021-2022 spike. As I said earlier, of course, the focus has shifted to Bitcoin, but the company’s current market cap of $76 billion shows that its Bitcoin holdings of $36.1 billion are just a portion of the value. Therefore, the P/S should still be a relevant measure of value for the stock and so with revenues near five-year lows, I believe the current P/S ratio is unjustified. For the P/B ratio, MicroStrategy started to buy Bitcoin back in 2020 and has been increasing their holdings since then, which deserves a premium, but the P/B ratio is now at approximately 2 times the five-year average, excluding the 2021 spike. Despite their aggressive strategy, I, personally, find the P/B ratio of over 24 to be too rich. From my analysis of the P/S and P/B ratios, I believe the stock is overvalued at current levels. For MicroStrategy stock, Seeking Alpha currently has an F valuation rating for the P/S ratio and a D- rating for the P/B ratio, confirming my evaluation. Conclusion From the above analysis, it is clear that the technicals differ highly with the fundamentals on their outlooks for the stock. The vast majority of technical indications were bullish as the chart showed the stock is in accelerated uptrends while MAs show strong bullish momentum. While indicators were a bit more mixed overall, there were key signals of strength that confirm the recent surge in the stock. For the fundamentals, with revenue being very sluggish, I find the stock to be overvalued in terms of the P/S ratio and while the increasingly large Bitcoin pile deserves a P/B expansion, I believe the ratio has gone too far currently as it is at an eye-watering level of 24. I therefore conclude that the stock is significantly overvalued at current levels. While the stock could revert to reflecting its fundamentals in the long run and prove Citron Research to be right in the long run, in the near term, I believe the stock could have room to run due to the technicals being heavily in MicroStrategy’s favour. With conflicting technical and fundamental signals, I initiate the stock at a hold rating, but I believe shorts are at a high risk of being burned before their predictions come true.

Source: Seeking Alpha