A few companies have started adding Bitcoin ( CRYPTO:BTC ) to their balance sheets as a substitute for ultra-safe cash and bonds. Others have taken advantage of skyrocketing share prices by issuing new stock certificates. A handful of brave corporations have even combined the two strategies lately, raising cash through stock offerings and investing some or all of it into Bitcoin tokens.
Movie theater operator AMC Entertainment Holdings ( NYSE:AMC ) raised $2.06 billion of cash over the last four quarters, staving off the threat of bankruptcy in a time of coronavirus restrictions and deeply negative cash flows. Should AMC convert some of its sorely needed cash reserves into digital coins?
Some would call it a reckless move, and they aren’t wrong. However, the idea isn’t completely crazy — as long as AMC goes deeper into the cryptocurrency market with some caution. Image source: Getty Images. A risky idea
Buying Bitcoin tokens for the purpose of holding them on your corporate balance sheet is not a common practice. The standard-bearer here is business analytics company MicroStrategy ( NASDAQ:MSTR ), which has invested $3.7 billion in a Bitcoin collection now worth $5.8 billion. This company reinvested most of its long-term investment papers in Bitcoin tokens in the second half of 2020, raised $2.4 billion in new debt and another $400 million in a stock offering for the sole purpose of buying even more tokens. MicroStrategy also sweeps its free cash flows directly into — you guessed it — buying more Bitcoin.
MicroStrategy’s Bitcoin collection is worth $5.75 billion at current conversion prices. The company’s market cap is $5.66 billion, or 1.6% less .
That strategy could pay off handsomely if Bitcoin prices deliver meaningful growth in the long run. MicroStrategy could gain billions of dollars from its digital investments under the right circumstances, where Bitcoin prices double or triple in 2022. Sounds effects like “ka-ching” and “bingo” would be appropriate in that case, and MicroStrategy could leverage its surging Bitcoin investments to grow and enhance its core business.
It could also backfire horribly under different circumstances. For example, Bitcoin prices might stall and crash again, like they did after another raging growth spurt in 2017. Or, another digital currency might push Bitcoin off the throne and take over as the obvious choice for digital currency investments. Both of these possibilities would smash Bitcoin’s high-flying price to the ground. It could take years to regain what was lost, and there’s no guarantee that Bitcoin would ever recover.
MicroStrategy might survive a Bitcoin meltdown, at least for a few years. The company makes money on its business analytics operations, reporting $64 million in earnings before interest and taxes over the last four quarters. A cryptocurrency crash would be painful and the dream of digital wealth could vanish in a heartbeat, but the company should survive. AMC shouldn’t go all in on Bitcoin
The movie theater chain enters the picture from a very different angle.
AMC’s operating profits were barely positive in 2019, clocking in at $169 million on top-line sales of $5.5 billion. That works out to an operating margin of just 3.1%. MicroStrategy is boasting a 12.6% reading on the same metric right now while AMC’s operating results have been clobbered by the pandemic. AMC showed a $1.7 billion loss from operations in the trailing four quarters.
Left to its own devices, MicroStrategy can scrape by while generating respectable revenues and profits from its ordinary business operations. AMC could burn through its cash reserves in a year or so if the movie business stays unprofitable. To keep the lights on, the company might need unfortunate tactics such as raising more debt, selling more stock, or asking its debtholders for a break on interest payments.
Don’t believe me? Just watch: AMC Total Long Term Debt (Quarterly) data by YCharts The company has indeed resorted to these ideas to make it through the pandemic. AMC has increased its long-term debt balance by 15% while the diluted share count was multiplied by five in this year’s rush to cash in on unreasonably high share prices.
Converting all of AMC’s long-term capital into Bitcoin would be a risky idea indeed. The company would bet the proverbial farm on the future of Bitcoin pricing, accepting that a weak year or two could trigger bankruptcy proceedings. A safer approach
MicroStrategy’s all-in bet on Bitcoin is an extreme example, of course. Other companies have added much smaller Bitcoin servings to their long-term holdings.
Electric vehicle maker Tesla ( NASDAQ:TSLA ) has invested $1.5 billion in 43,200 Bitcoins, and digital […]
source Should AMC Make a Billion-Dollar Bet on Bitcoin in 2022?
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