Summary MSTR introduced a new KPI called "BTC Yield" to measure the growth in BTC holdings per share, setting the foundation for greater clarity on their Bitcoin strategy. MSTR's use of convertibles to finance BTC purchases at low interest rates is a clever strategy to maximize BTC Yield and leverage their capital structure. Despite a mediocre software business, MSTR's focus on BTC Yield make it a compelling buy, although short-term BTC price volatility remains a risk. I would have liked to hear some info about their Bitcoin-based product launches like MicroStrategy Orange. This could be a compelling value driver in the future. This article is about my takeaways from the MicroStrategy ( MSTR ) Q2 earnings call on 1 August 2024. I was pretty impressed with everything, although there is one thing I wished we’d heard more about. Overall, I am even more bullish on the stock after this call because it seems that management is clearly setting the foundation for greater clarity amongst investors on what exactly is MicroStrategy’s strategy with Bitcoin ( BTC-USD ). BTC Yield The main thing was MSTR’s new KPI which they call “BTC Yield.” In the words of Phong Le, CEO of MicroStrategy: We define BTC Yield as the period-to-period percentage change in the ratio of our total bitcoin holdings to our assumed diluted shares outstanding. Here is how the KPI specifically deals with dilution from convertibles and stock options because a lot of people will undoubtedly have questions in that area: When we refer to assumed diluted shares outstanding, we're assuming all outstanding convertible notes or fully converted at the respective conversion prices. All outstanding options are fully exercised. And all restricted stock units and performance stock units fully vest, in each case without regard to exercise or conversion price or investing or other contractual conditions. When I saw this, I immediately understood what he was getting at. You see, perhaps the biggest controversy regarding MSTR is why it trades at a persistent premium to the BTC it holds on its balance sheet. A lot of investors cannot figure it out. Kerrisdale recently published a bear thesis against MSTR , citing this premium as the core reason for a long BTC, short MSTR pairs trade. (I have also discussed why such trades are probably more common than you think, and that they are actually a signal of the Bitcoin spot ETFs being not as popular as the numbers have been showing, since much of the inflows are likely for these pairs trades.) I have repeatedly argued that MSTR’s premium is justified because the shares are accretive. The BTC per share metric rises over time, even though the shares outstanding has increased. In fact, issuing shares to buy BTC will always be accretive on a BTC per share basis, if the shares trade at a premium to the underlying BTC. However, MSTR has done more than simply issue common stock. It has opportunistically used debt and convertible debt too. It also uses excess cash from business operations, although this is responsible for a fairly small amount of the BTC purchased. MSTR’s introduction of the BTC Yield KPI blatantly confirmed that this was their intention all along. Just see what Phong Le says: Management uses Bitcoin Yield to evaluate capital allocation decisions, and to measure the achievement of our bitcoin strategy. Our strategy of acquiring bitcoin in a manner we believe to be accretive to shareholders, thereby achieving bitcoin yield, sets us apart from institutional bitcoin investment options that charge a management fee. Here he differentiates MSTR shares and Bitcoin spot ETF shares (which he later says generates a negative BTC yield thanks to the expense ratios). While a share of an ETF always represents the same amount of BTC, a share of MSTR has experienced an increase in the amount of BTC it represents. This is accretive. It is, by their definition, a positive BTC Yield. Slides 7 and 8 showed MSTR’s historical BTC Yield. It is really quite marvelous because it means that shareholders are increasing their BTC holdings (owned via MSTR stock) by sizable numbers in each of the last few years. BTC Yield (MicroStrategy Earnings Q2 2024) Meanwhile, Slide 8 is even more noteworthy, as they are guiding for 4-8% BTC Yields for the next three years. This means management expects that every 1 BTC held via your MSTR shares can grow to 1.125 - 1.26 BTC within three years. This is pretty groundbreaking guidance. BTC Yield (MicroStrategy Earnings Q2 2024) All of this means MSTR is fully committed to pushing through the idea of accretion when measured in BTC terms. This is what getting on the Bitcoin standard partly entails: to start thinking about things in terms of BTC. Their core belief is that as long as shares represent ownership in more BTC over time, then management must be doing right by the shareholders. The introduction of the BTC Yield KPI is so important because it is like a direct response to all the accusations of the premium being unjustifiable. This is, as classily and inasmuch layman’s terms as possible, a rebuttal to the tiresome critique launched by people who are just ignorant to the economic realities or intentions of the matter. I think that as the market begins to internalize the gravity of BTC Yield, they will start to reprice MSTR in an important way. Currently, MSTR has a lot of short interest, some of which is presumably from traders who do not understand the nuances of BTC Yield and what MSTR is trying to do. What happens when some of these shorts are no longer part of the equation because they realize that there was a good reason for the premium after all? The stock would clearly reprice upwards, all else equal. Currently MSTR trades at around 2x its BTC holdings. Perhaps we could see this number go to 2.5x or even higher. MSTR has proved very effective in putting up impressive BTC Yields in the past. What multiple to NAV per share makes sense if NAV per share is expected to increase 4-8% per year over three years? That is a question the market must figure out, but so far with a lot of market participants still not getting it (because they evidently expect no premium at all), the market has settled on a 2x multiple to NAV per share. Clever Use Of Convertibles I was pretty happy to see this slide showing $3.5 billion borrowed at an weighted average rate of 1.6%, thanks largely to convertibles. Principal debt maturities. (MicroStrategy Earnings Q2 2024) I detailed the power of using convertibles to finance BTC purchases in my last Bitcoin article . Here’s the rundown: Convertible debt is debt with an equity call option attached and given to the lender. Option values are determined by implied volatility. When a company has BTC and debt on the balance sheet, its equity starts to resemble a leveraged version of BTC. Since BTC is very volatile, this means the stock has a very, very high implied volatility. That increases the value of the options embedded within the convertible debt, which justifies a lower interest rate on the convertible. This is precisely how MSTR is borrowing at under 1% interest rates to buy BTC, while the risk-free rate is 5%. In short, convertible debt plus a leveraged BTC capital structure is perfect for raising capital to buy BTC for the purpose of generating a positive BTC Yield. More BTC and more leverage makes the stock even more volatile, which lowers the interest rate of future convertibles even more. This is a vicious loop which MSTR is fully exploiting in a bid to maximize BTC Yield. Operating Business Growth MSTR runs a pretty mediocre software business. If they receive subscription revenue from their business intelligence software. Subscription revenues have grown 21% YoY, which is definitely nice, even though it did miss the revenue forecast by about 10% . Growth means that possibly more cash flows from the operating business may also be employed towards BTC Yield. Operating Business Growth (MicroStrategy Earnings Q2 2024) What I Thought Was Missing In what was very well aligned with their rebranding to the first Bitcoin Development Company 6 months ago, MSTR had launched a decentralized digital ID product over Bitcoin called MicroStrategy Orange back in April . I get that the product probably isn’t ready yet, but I would have liked to hear some info about it or some other Bitcoin-related product line they are thinking about. I think that given MSTR’s nearly cult-like following in the Bitcoin community, they are uniquely able to create products which will gain immediate brand recognition and baseline trust. This is something that few talk about in a MSTR investment thesis. A great reputation matters a lot in business, and if they are now doing development on the Bitcoin ecosystem, where plenty of work certainly needs to be done, then I would not be surprised if they push through a product which ends up being very profitable simply because the Bitcoin community wants to support them. There are, of course, marketing and public relation considerations. Bitcoin fans lean on the side of distrust and skepticism, so such a product launch still needs to be well-planned. Another thing I was looking for, though this is more of a long shot, is if they’d ever deploy the BTC treasury for economic activity besides capital preservation. Even if they lended out some BTC for an interest rate, it could generate additional income for the company. Now that there are ways to stake BTC for yield in other crypto ecosystems, I do believe that MSTR is in a unique position to massively benefit from such activities. Ultimately, any extra income from strategically deploying the BTC reserve only contributes to a higher BTC Yield KPI. Risks I think MSTR is in a very good spot. The BTC Yield KPI is, in my opinion, a landmark announcement which more companies will likely adopt as they start Bitcoin treasuries of their own. As it pertains to this thesis, the market recognition of the value of positive BTC Yield might take a long time. People may still disagree with BTC Yield as something that merits a substantial premium to the BTC holdings. Another risk is the short-term variance of BTC. It seems BTC is having trouble breaking resistance over $70,000. This lull could exist for a while, and it could cause people to reprice downwards the current 2x multiple to BTC holdings as sentiment worsens. If BTC falls, MSTR generally falls about 1.1x as much, thanks to its leveraged capital structure. All of this means that BTC’s price is ultimately a persistent risk for MSTR stock. Conclusion My opinion of MSTR has only improved after this earnings call. I view the stock as a Buy. I think the stock split will be a huge catalyst for improved liquidity, but this earnings call demonstrated that management is committed to improving the information asymmetry which seems to be making major investors hesitate on MSTR. Overall, MSTR is running a pretty incredible strategy by procuring fiat financing at very low costs of capital to purchase an extremely scarce asset which has outperformed basically everything else. Leveraging BTC allows the business to achieve superior outperformance. The goal of acquiring more BTC is very well explained in their new KPI. I look forward to seeing how this number develops over future earnings calls.
