Analysts warn of potential risks during Nasdaq 100 index reshuffle

December 12 (Reuters) - Bitcoin investment firm, Strategy, is at risk of being removed from the Nasdaq 100 index during the annual reshuffle on Friday. This move is driven by growing concerns about its business model and its effect on the company's stock price, according to analysts.

Strategy, previously known as MicroStrategy before pivoting to a bitcoin investment strategy in 2020, saw its market value soar to $128 billion earlier this year. It was added to the Nasdaq 100 index in December 2023 under the technology category. However, critics questioned this decision, arguing that Strategy's business model, which has inspired several similar firms, is more akin to an investment fund than a traditional tech company.

For the quarter ending September 30, Strategy reported a net profit of $2.78 billion, a significant rebound from the $340.2 million loss in the same period the previous year. This turnaround was primarily driven by an accounting change that allowed it to report gains on its bitcoin holdings. In contrast, the companys legacy software business generated only $128.7 million in revenue.

"If MSTR is classified as a holding company or a cryptocurrency firm rather than a software company, it risks removal from the index," said Steve Sosnick, chief market analyst at Interactive Brokers. Nasdaq, which tracks the largest non-financial companies by market capitalization, declined to comment ahead of the Friday reshuffle announcement.

Nasdaq has reportedly been tightening its criteria for digital asset treasury companies, although it has not publicly addressed the inclusion of such firms in its indices. Strategy did not respond to requests for comment.

Index rebalances are highly anticipated, as they determine which companies benefit from billions in passive investment flows. Despite concerns, Strategy CEO Michael Saylor has downplayed fears of a possible exclusion, and some analysts believe it is unlikely that Nasdaq will remove the company from the index.

Concerns About Crypto Treasury Companies

There are increasing doubts about the viability of companies holding significant amounts of cryptocurrency, with Strategys stock being highly volatile and tied to bitcoins price fluctuations. Strategys shares have fallen 65% from their 2024 peak and are down 36% year-to-date, while bitcoin has seen a smaller drop of 3.6% this year.

As of Thursday, Strategys market capitalization had decreased to $52.7 billion, while its bitcoin holdings were valued at over $61 billion, according to Reuters estimates. This disparity, however, does not meet the threshold for exclusion based on market value alone.

Mike O'Rourke, chief market strategist at JonesTrading, noted that Strategys inclusion in the Nasdaq 100 was based on a technicality and suggested that Fridays reshuffle would be an opportunity for Nasdaq to correct what he considers an earlier mistake.

If Nasdaq decides to remove Strategy, the company could face passive fund outflows of up to $1.6 billion, according to Kaasha Saini, head of index strategy at Jefferies. Global index provider MSCI is also reviewing its position on digital asset treasury companies and will decide in January whether to exclude Strategy and similar firms. Despite these challenges, Saylor remains confident that even if excluded, the company would continue to thrive.

Analysts like H.C. Wainwrights Mike Colonnese believe Strategy is unlikely to be removed from the index, given that it still has a higher market value than many other Nasdaq 100 members.

Other companies potentially at risk of being removed from the Nasdaq 100 include drugmaker Biogen, IT services provider CDW, and four other companies with the lowest market capitalization in the index. Jefferies also forecasts that retail giant Walmart, which has a market cap of $932.7 billion, will not qualify for inclusion in this reshuffle, as its first day of trading on Nasdaq was after the November 28 reference date.

The final reshuffle announcement is expected after market close on Friday, with the changes set to take effect on December 22.

Sources:

• Analysts flag risks for Strategy at Nasdaq 100 index reshuffle

Author: Logan Reeves
Logan Reeves is a sports analyst and journalist. He writes match reviews, conducts athlete interviews, and produces data-driven predictions.