In a significant milestone for the cryptocurrency industry, MicroStrategy (MSTR) has become the first bitcoin-focused company to join the elite Nasdaq-100 index. The software firm, known for its massive bitcoin holdings, will be added to the tech-heavy benchmark on December 23, 2024. But according to a new report from broker Benchmark, this could be just the beginning of MicroStrategy’s ascent into the upper echelons of U.S. stock indices.
The report suggests that MicroStrategy’s Nasdaq-100 inclusion may pave the way for an even bigger opportunity: joining the S&P 500, widely regarded as the most important U.S. stock index. While entry into the Nasdaq-100 is a major achievement in its own right, being part of the S&P 500 would expose MicroStrategy to an even larger pool of institutional investors and index-tracking funds.
Meeting the S&P 500 Criteria
So what stands between MicroStrategy and S&P 500 inclusion? According to Benchmark analyst Mark Palmer, the company currently meets some, but not all, of the index’s stringent requirements. MicroStrategy easily satisfies the S&P 500’s market capitalization and trading volume thresholds, two key criteria for consideration.
However, the bitcoin firm falls short on the earnings front. To join the S&P 500, a company must report positive earnings in its most recent quarter and demonstrate cumulative profitability over the trailing four quarters. As of now, MicroStrategy does not meet these earnings benchmarks.
The Path to Positive Earnings
But there may be a solution on the horizon. MicroStrategy has announced plans to adopt new Financial Accounting Standards Board (FASB) guidance on the treatment of digital assets like bitcoin. Under the updated rules, which the company intends to implement in Q1 2025, MicroStrategy would be able to report the value of its bitcoin holdings at cost rather than marking them to market prices.
This accounting change, Benchmark argues, “would position [MicroStrategy] to immediately begin reporting positive earnings.” In other words, by no longer having to record bitcoin’s volatile price swings on its income statement, MicroStrategy could meet the S&P 500’s profitability requirements and clear a major hurdle to index inclusion.
The Tesla Precedent
If MicroStrategy does achieve S&P 500 inclusion, it could see a significant boost to its stock price. Benchmark points to electric vehicle maker Tesla as a potential model. When Tesla joined the S&P 500 in December 2020, its shares had already surged tenfold in anticipation. In the year following its inclusion, Tesla stock doubled again to $400.
While MicroStrategy may not see quite the same meteoric rise, S&P 500 inclusion would undoubtedly be a major catalyst. Membership in the index would force hundreds of billions of dollars in index-tracking and benchmark-hugging funds to buy MicroStrategy stock, providing a sustained tailwind for the share price.
“The enormous impact of entering the S&P 500 could be seen with Tesla, which saw its stock surge following its inclusion in the index on Dec. 21 2020. The stock doubled in the space of a year from $200 to $400 a share.”
– According to the Benchmark report
A Crypto Milestone
Beyond the potential share price impact, MicroStrategy joining the S&P 500 would represent another major milestone for the mainstreaming of cryptocurrencies and digital assets. As the first bitcoin “pure play” in the Nasdaq-100, MicroStrategy has already broken new ground. S&P 500 inclusion would further cement the legitimacy and maturity of the crypto space in the eyes of institutional investors.
Of course, MicroStrategy’s path to the S&P 500 is not yet assured. The company must successfully implement the new FASB guidance and demonstrate consistent positive earnings. And there’s always the possibility that the index’s selection committee could opt for other firms, even if MicroStrategy does check all the boxes.
Still, the Benchmark report makes a compelling case that MicroStrategy is closer than ever to S&P 500 inclusion. With its Nasdaq-100 entry secured and an accounting change on the way, the bitcoin firm may soon take its place among the largest and most influential public companies in the United States. For MicroStrategy, and for the crypto industry as a whole, that would be a landmark achievement indeed.
