MicroStrategy Incorporated (MSTR) shares rose more than 10% during Tuesday's session after the company used half of its $500 million in cash to purchase 21,454 bitcoins and announced plans for a modified Dutch auction to buy back its own stock with the other half.
The company's management team believes that Bitcoin is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash. In particular, the team believes that the cryptocurrency provides a reasonable hedge against inflation and the prospect of earning a higher return than other investments.
In disclosing the plans for its $500 million in cash, the company announced that it intends to run the business with $50 million in operating cash and utilize the excess cash in similar ways on an ongoing basis by purchasing MicroStrategy stock and investing in "alternative investments."
During the second quarter, MicroStrategy's revenue fell 6.1% to $110.58 million, missing consensus estimates by $1.64 million, and GAAP earnings per share came in at 35 cents, missing consensus estimates by five cents per share. The company's much-watched cash position fell 4.7% during the quarter to $539.2 million after it repurchased about 350,000 shares in the first quarter.
From a technical standpoint, MicroStrategy stock broke out from its 200-day moving average toward highs made earlier this year. The relative strength index (RSI) rose into overbought territory with a reading of 78.49, but the moving average convergence divergence (MACD) experienced a bullish upswing. These indicators suggest that the stock could see some near-term consolidation before extending its rally higher over the coming sessions.
Traders should watch for consolidation between the ascending triangle price target of $144.50 and the 200-day moving average at $132.97 over the coming sessions. If the stock breaks out from these levels, traders should watch for a move to retest highs of $165.00. If the stock breaks down, traders could see a move lower to retest trendline support near $125.00. Of course, the move into Bitcoin suggests that the crypto asset's price could influence valuation.
The author holds no position in the stock(s) mentioned except through passively managed index funds.