Despite MicroStrategy outperforming every stock in the Standard and Poor’s (S&P) 500 over the past four years, market observers are split on whether it could make the index in the near future.
Optimistic voices say it’s only a matter of time. In early September, the median market capitalization in the S&P 500 was $33.5 billion, reported CNBC. Among the 500 largest corporations in the United States that comprise the index, the 250th (i.e., middle point) company had a stock market value of $33.5 billion.
By comparison, MicroStrategy’s market cap was $33.6 billion at the time of writing on Sept. 27, which puts it right in the thick of things. The company is widely viewed as a Bitcoin (BTC) stand-in with 266,000 BTC in its treasury — more than any corporation in the world — but this may not be a problem in the long term, according to some knowledgeable market observers.
MicroStrategy stock chart year-to-date Sept. 27. Source: TradingView
Still, an S&P 500 listing is “probably not” coming anytime soon, Seoyoung Kim, associate professor of finance at Santa Clara University’s (SCU) Leavey School of Business, told Cointelegraph.
The S&P 500 has certain entry requirements. The company must be trading on one of the largest US stock exchanges — such as the New York Stock Exchange, the Nasdaq or the Chicago Board Options Exchange — and generate at least half its revenues in the US. It also has to have an $18 billion market cap or higher. These aren’t problems for the firm, however.
What is concerning for MicroStrategy, though, is that a candidate must have been profitable in the most recent year and quarter to qualify.
Does MicroStrategy have an earnings problem?
According to Kim, “MicroStrategy has consistently seen a negative bottom line,” with the exception of the fourth quarter of 2024, “which was insufficient to bring it to an overall positive net income.”
Joe Nardini, co-head of investment banking at B. Riley Securities, agreed. “MicroStrategy has a $31 billion market capitalization, so it has the free float to qualify for the S&P 500,” he told Cointelegraph. “The issue that I see is the requirement to be net income positive.”
Achieving the necessary consistency of earnings may not be so easy because of the enormous amount of BTC that the firm carries on its balance sheet, where “the changes in value of the BTC are run through its earnings stream,” noted Nardini. He added:
“That sometimes makes net income negative. So that alone may disqualify MicroStrategy from inclusion in the [S&P 500] index.”
“I do not think the Bitcoin connection is a problem from a reputational standpoint, but possibly through excessive volatility,” Russell Rhoads, clinical associate professor of financial management at Indiana University’s Kelley School of Business, told Cointelegraph. He added:
“The larger, more mature firms that comprise the S&P 500 are less volatile, so it is possible the price action in MicroStrategy stock, as influenced by Bitcoin volatility, could be a deterrent.”
Not a “typical” S&P 500 candidate
A larger problem, then, could be that the S&P 500 is a bastion of the traditional corporate world, and MicroStrategy’s unusual structure just doesn’t fit the mold.
Any individual, family, company, or country can copy MicroStrategy and enjoy the same outperformance. #Bitcoin pic.twitter.com/hE37gCUCRQ
— Michael Saylor⚡️ (@saylor) September 22, 2024
As Bank of America’s private bank noted recently, the index is populated by major corporations “with proven earnings and strong balance sheets [that] have historically tended to provide stability, consistent returns and dividends.”
MicroStrategy, because of its “unique” structure, “doesn’t generate revenues and earnings in the sort of consistent manner that SPX listing criteria require,” Steve Sosnick, chief strategist at Interactive Brokers, told Bloomberg earlier this year.
“The [S&P 500] index committee has the final say at the end of the day,” Bitwise’s senior quantitative research analyst Gayatri Choudhury told Cointelegraph. “And in reality, MicroStrategy’s financial profile doesn’t reflect the typical S&P 500 candidate.”
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The firm’s revenue is volatile, continued Choudhury, and it lacks “the consistent earnings or business model that the index usually demands. While it’s a data analytics company on paper, its real draw is its enormous Bitcoin holdings.”
The company’s financials continue to be volatile due to fluctuations in the BTC price. “That makes it less attractive to the S&P committee, which favors a more conservative approach,” said Choudhury, who doesn’t expect MicroStrategy to join the S&P 500 anytime soon.
Waiting for a slot to open
That said, it’s easy enough to imagine a time when Bitcoin’s volatility and MicroStrategy’s earnings variability settle down. What then?
Even then, the company’s entry isn’t assured because S&P 500 candidates still have to wait for another company to drop out. Membership is capped at 500, after all. Still, replacements happen fairly often. The index has had eleven removals in 2024 alone, most recently American Airlines Group on Sept. 23.
The index tries to be representative of the overall American economy, so it also matters the sort of company that is being replaced. “If a retailer drops out, a similar firm may be more likely to replace it as opposed to a technology firm,” Indiana University’s Rhoads told Cointelegraph. He added:
“Trying to guess who is next with respect to S&P 500 additions is pretty difficult.”
In fact, MicroStrategy may not even be the best crypto-focused candidate for S&P 500 inclusion. “Coinbase is more likely to make the cut if it can show a more consistent positive bottom line, which is impacted by ongoing regulatory challenges,” said SCU’s Kim.
Todd Sohn, exchange-trade fund strategist and managing director at Strategas Asset Management, agreed that MicroStrategy faced obstacles, including managing “four consecutive quarters where the sum of earnings is positive.” But even if it knocked out consistent positive earnings, he told Cointelegraph:
“There’s a handful of companies who could be in line before MicroStrategy, just due to size — Coinbase, for example.”
“Odds are in their favor”
Others suggest it’s just a matter of time before MicroStrategy joins the S&P 500, often seen as a surrogate for the entire US stock market.
“If we see BTC grow above $100,000, then they could potentially make it based on the size of their holdings,” Aki Balogh, co-founder and CEO of DLC.Link, told Cointelegraph.
Nor should the firm’s Bitcoin holdings be problematic in the long run. “MicroStrategy is both a proxy for holding BTC and also recently announced that they’re making investments into becoming a Bitcoin development studio,” Balogh noted.
“If a gold mining company had large gold reserves, it would not be a reason to exclude it from the S&P 500,” Matthew Le Merle, CEO of Blockchain Coinvestor, a blockchain venture capital firm, told Cointelegraph. “So why does it matter that MicroStrategy holds a lot of Bitcoin?”
According to Rhoads, “MicroStrategy is larger than just under half of the current S&P 500 members so the odds are in their favor to eventually be added to the 500.”
A signal event for crypto
If and when that happens, it would be a significant event for the crypto industry.
“Anyone that owns an S&P 500 index fund will own Bitcoin once MicroStrategy makes it into the index,” said Rhoads.
Balogh agreed that MicroStrategy inclusion would be symbolic for the crypto sector. “MicroStrategy is respected widely by the Bitcoin community.[…] They’re in a great position to popularize BTC and explain its benefits to TradFi while maintaining the focus on decentralization.”
Any crypto-focused corporate entry — like MicroStrategy or Coinbase — “would at least lend credence to the growing popularity and influence of crypto,” added Sohn.
Kim wasn’t as certain: “I don’t see MicroStrategy’s inclusion in the S&P 500 being a victory for the crypto and blockchain industry. I think that greater victory is already demonstrated by established S&P 500 financial institutions, such as BlackRock, that have begun to offer crypto products and services.”
Better-defined regulatory treatment “will be the real big deal for the crypto and blockchain industry,” Kim added.
MicroStrategy has been a “pioneer,” concluded Le Merle. Most treasurers at large corporations “will in time include some Bitcoin in their balance sheet holdings, and this is the more important matter to track and assess.”
MicroStrategy just happens to have taken that strategy to an extreme. “We believe another 499 S&P companies will eventually follow,” Le Merle commented.
