MicroStrategy could see $3 billion earnings boost if it adopts new accounting rules: Benchmark

According to a Wednesday investment note by Benchmark, if MicroStrategy adopted new accounting rules, the impact on its earnings per share would be massive. The investment banking firm added that adopting the latest accounting standards means MicroStrategy could qualify for inclusion in the SP 500.

"The company in its 2023 10-K report estimated that early adoption of the new accounting rules would increase its 2024 beginning retained earnings balance by around $3.1 billion," the Benchmark analysis note said.

Benchmark estimates that if MicroStrategy elects for early adoption of the Financial Accounting Standards Board's (FASB) new ASU 2023-08 standard, it could report a gain of more than $300 per share during 1Q24.

Inclusion in the SP 500 

According to the Benchmark research note, a company must report positive earnings in its most recent quarter to be considered for inclusion in the SP 500 by the committee that runs the index. Benchmark observed that while MicroStrategy has reported losses in 10 of the past 14 quarters, early adoption of the new accounting standards could enable the software company to meet this final criterion.

"Inclusion in the SP 500 would position MSTR’s stock valuation to receive an ongoing boost from the price-agnostic purchases of its shares resulting from enormous passive inflows," Benchmark analyst Mark Palmer noted.

Benchmark stated that MicroStrategy currently employs the existing FASB rule ASC 350. But, as a result, the firm's unadjusted earnings have been adversely affected during quarters when the value of its bitcoin holdings decreased.

According to Benchmark, several dozen bitcoin-holding companies have chosen early adoption of the new ASU 2023-08 guidance. However, the Benchmark analyst noted that investors are divided on whether MicroStrategy will opt for early adoption.

MicroStrategy's cumulative impairment losses

The investment banking firm noted that MicroStrategy has recorded over $2.26 billion in cumulative impairment losses due to using the existing FASB rule ASC 350.

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"This has required the company to account for its bitcoin holdings as indefinite-lived intangible assets, and to treat any decline in their carrying value during a given quarter due to a drop in bitcoin’s price as an impairment loss," Benchmark added.

According to Wednesday's Benchmark analysis note, MicroStrategy Executive Chairman Michael Saylor described the FASB's cost-less-impairment model as "punitive," and the company is advocating for the FASB to adopt new accounting guidance that it argues would enable it to better reflect the value of its bitcoin holdings.

MicroStrategy's performance significantly outpaced bitcoin

Benchmark's evaluation described MicroStrategy's share price as increasing by a multiple of 10 since adopting its bitcoin acquisition strategy in August 2020. 

"MicroStrategy's performance during that span significantly outpaced the returns of bitcoin, the major stock indices, commodities such as gold, and big tech stocks," the Benchmark analysis note added.

MicroStrategy shares, listed on Nasdaq, were down 0.52% and priced at $1,259.11 at 9:14 a.m. ET, on Thursday. The company is scheduled to report its first-quarter 2024 results after the markets close on April 29.