Summary Since my last article in mid-March, MicroStrategy stock has declined along with Bitcoin. The company's premium to BTC decreased from 90% to 78%. MicroStrategy raised another $800 million in June through convertible notes, the proceeds of which were used to buy more BTC. The recently announced stock split may increase liquidity for MSTR shares as it potentially attracts more retail buyers at the lower price point. On March 19th, Seeking Alpha published my article covering MicroStrategy ( MSTR ) in which I said the company's stock had traveled "too far, too fast." Despite MSTR shares being my top pick for 2024 just four months prior, I had sold my position based on the assumption that Bitcoin ( BTC-USD ) would decline and bring MSTR shares down with it. Though certainly not in a straight line, those assumptions have since panned out and both BTC and MSTR are now down against a broader Nasdaq that has added 15% since mid-March: Data by YCharts Admittedly, MSTR has held up better than BTC since my article, and that's somewhat surprising to me. One of my primary arguments in "Too Far, Too Fast" was that MSTR's stock valuation relative to the Bitcoin that the company holds should not be trading at a significant premium to the value of the BTC, let alone the 90% premium MSTR shares commanded at the time. To put it mildly, this point was debated in the comments section, where I was assured that the premium was too low and could even revisit 5 to 6x BTC value. In this update, we'll again look at MicroStrategy's premium to BTC stack, the company's latest purchases of BTC since my previous note, and the recent announcement of a stock split. The Premium On the surface, it appears as though my insistence that it is preposterous to pay a 90% premium for the BTC on MicroStrategy's balance sheet has been wrong. Afterall, BTC has declined by more than MSTR shares since mid-March. However, MicroStrategy's Bitcoin premium has actually gone down from 90% in mid-March to just 78% as of 7/10/24 close, based on a $13.0 billion BTC HODL and a $23.2 billion market cap. I still believe this premium is too high, and I will die on this hill. Key reasons: MicroStrategy already commands significant valuation multiples based on the business' fundamentals, such as earnings or revenue. The presumption that shareholders should get an additional multiple of 5 to 6 times the company's BTC liquidity fails for me. The Bitcoin is not a productive asset, as it's not monetized or utilized in any way. In my view, to justify paying a premium for this BTC, it would have to be generating a yield of some kind - which it isn't. And even then, the premium should be well below 78%. Data by YCharts Purely on business fundamentals, the stock is highly overvalued at nearly 50x forward sales. Especially considering MicroStrategy has often produced negative quarterly net income. To be sure, these shares are a Bitcoin play more than they're an investment in MicroStrategy as a business. I understand why some MSTR bulls believe the stock should garner a premium to the BTC liquidity, I just don't agree with them, and we can probably leave it at that. Fresh BTC Purchases In June, MicroStrategy raised an additional $800 million in convertible senior notes due in 2032. The interest rate on this recent round of notes is 2.25%. This is a noticeable increase from the company's March offerings, which were 0.875% and 0.625%. Those March notes collectively raised $1.4 billion and are due in 2030 and 2031. Thus, this last round isn't at quite the favorable terms for MicroStrategy as the previous offerings. In any case, the proceeds from MicroStrategy's June offering were immediately put to work through purchases of an additional 11,931 BTC at an average price of $65,883 per coin . Purchase History (BitcoinTreasuries.net) The company now holds 226,331 BTC in treasury, with a little over $3.7 billion before interest due between 2027-2032. Despite a 12% haircut on the value of the Bitcoin purchased last month, the corporate treasury management strategy has been simply fascinating to watch. I question how long Executive Chairman Michael Saylor can continue doing this, but so far, borrowing in dollars long term to buy Bitcoin now is working quite well. The Stock Split If we operate with the assumption that Michael Saylor wants to buy this big dip in BTC, the recently announced MSTR stock split makes quite a bit of sense. While stock splits don't fundamentally change the value of the equity, they do theoretically grow liquidity for a company's stock. For instance, at $1,350 per share, retail buyers may be less likely to purchase MSTR because of either share price sticker shock or an inability to buy fragmented shares through their broker. With MicroStrategy's planned 10 for 1 stock split coming in early August, 17 million shares at $1,350 turn into 170 million at $135. This makes buying MSTR far more palatable for lower net worth investors. NVDA Daily (TrendSpider) Again, there is no fundamental change to the underlying business or equity that makes MSTR shares more attractive to potential buyers. But there is precedent for stock splits leading to higher valuation, shortly after splitting. Recently, NVIDIA ( NVDA ) just did a similar 10-1 split in June, and the price of the stock rallied nearly 16% over the seven sessions that followed. Even in the event that MSTR doesn't garner the same kind of post-split rally that NVDA did in June, the very notion that MSTR is doing the split at all may push MSTR prices higher as traders try to front run retail buyers who would hypothetically acquire shares post-split. Risks Leverage works great in a bull run, it's a bit more problematic in a bear market. Bitcoin is still very much in a bull market, but the top crypto has much shorter bull/bear cycles than what equity investors are likely used to and there is a fairly high likelihood Bitcoin will enter another bear before MicroStrategy's convertible notes are due. Data by YCharts Given the company's anemic growth in the underlying business, it's unlikely that cashflow from operations can be used for redemption of the convertible notes. Which means MicroStrategy will either have to sell down the Bitcoin stack to deliver note holders cash or dilute shareholders. I suspect MicroStrategy will go with the latter approach. Conclusion Believe it or not, I still actually like MicroStrategy at the right price. However, I don't think an 80% premium to the value of the company's BTC is where I'm a buyer. I think this stock is phenomenal as a trading proxy for Bitcoin. But as a long term investment, I see issues; the underlying business isn't growing and capital gains in the equity are entirely dependent on Bitcoin's price going up. And if you believe that last part is a certainty, you're probably better off just buying Bitcoin.
