Summary MicroStrategy's valuation is heavily inflated due to its massive Bitcoin holdings, making it a risky bet if Bitcoin prices consolidate. Despite bullishness on Bitcoin, MicroStrategy's premium on Bitcoin holdings is unjustified as there are no holding benefits for BTC in a corporate context. MicroStrategy's core software business is losing money and the company has heavily increased its share count in the last several years. The company’s aggressive capital raises and debt issuance dilute shareholder value, further increasing the investment risk. Investors now pay a significant premium to MicroStrategy's Bitcoin holdings that is simply not warranted or justified. MicroStrategy ( MSTR ) is a business intelligence company that has focused on assembling the largest corporate position of Bitcoin ( BTC-USD ) in the world. While there were other companies that have invested money into Bitcoin -- such as Block ( SQ ) or Tesla ( TSLA ) -- MicroStrategy is by far the biggest owner of Bitcoin today with a stash of 279,420 Bitcoin (as of November 11, 2024). MicroStrategy’s market valuation has ballooned to ~$100B, mainly due to a steady stream of convertible notes offerings whose cash has been used for additional Bitcoin purchases. MicroStrategy is using its core business intelligence operations as a way to leverage up its balance sheet which makes the company at this point a directional bet on the Bitcoin price. However, investors buying MSTR pay an excessive premium to the actual Bitcoin price which makes MicroStrategy not only overvalued, but also potentially set for a massive correction if the Bitcoin price consolidates. Data by YCharts Previous rating and why my previous investment thesis didn't work out I rated shares of MicroStrategy a sell in March of this year -- A Bad Deal For Investors -- due to concerns about the company’s aggressive pace of convertible notes offerings. However, I have been heavily bullish on the price of Bitcoin in the last several years, so much so that I made the digital currency my largest portfolio position. Shares of MicroStrategy have soared since my last coverage, chiefly because of a surging Bitcoin price. The implied premium per Bitcoin is excessive, however, and I see signs of a bubble in MicroStrategy’s share price. What has changed my rating to strong sell is that the Bitcoin price has risen sharply, but MicroStrategy's share price has generated even stronger returns which indicates that investors are overvaluing the company's Bitcoin holdings. Given this discrepancy in the rate of price appreciation between MSTR and BTC, buying MSTR today reflects even higher risks than when I covered MicroStrategy eight months ago. Favorable changes in the regulatory landscape have boosted crypto investor sentiment There are a number of reasons why my investment thesis didn't unfold as expected, the number one reason being that a sustained rally in Bitcoin prices has allowed MicroStrategy to continue (and accelerate) its bitcoin-for-debt strategy. Bitcoin, as well as the broader cryptocurrency market, have also greatly benefited from the presidential election win of Donald Trump who has promised to become the "first crypto president" and which has benefited sentiment in the cryptocurrency market greatly. Additionally, a pro-Bitcoin regulatory environment is beginning to take shape, which included the resignation of SEC chairman Gary Gensler... a figure that is not held in high regard by the crypto-community due his crackdown on the industry. If Donald Trump follows through with his announcement to make the U.S. into the crypto capital of the world, the Bitcoin price may continue to rise, potentially even dramatically which obviously would benefit MicroStrategy. Due to these factors, Bitcoin successively reached new highs, allowing MicroStrategy's Bitcoin gamble to continue. As you can see in the chart below, the differential between the Bitcoin price and the share price of MicroStrategy has greatly expanded lately... indicating that a more serious bubble is brewing here than even six months ago. Data by YCharts MicroStrategy's Bitcoin holdings, investment strategy and capital raises MicroStrategy owned 252,220 Bitcoin as of October 29, 2024, which calculates to an average price of $39,266 per-Bitcoin. MicroStrategy has consistently acquired additional Bitcoin over time and has become the largest corporate owner of the digital currency in the world. In November, MicroStrategy raised another $2.1B through a capital offering in order to acquire another 27,200 BTC which brought the total Bitcoin holdings to 279,420 Bitcoin (at a new average price of $42,692 per Bitcoin. MicroStrategy With the Bitcoin price currently hovering just below $100,000, MicroStrategy’s valuation consists chiefly of unrealized capital gains. In fact, MicroStrategy’s unrealized Bitcoin investment gains current amount to ~$16B (based off of the data just provided). MicroStrategy, however, has widely outperformed the Bitcoin price in 2024, which raises questions about MSTR being in a bubble. MicroStrategy’s core software intelligence operations make up a small part of the company’s actual business (which now mainly consists of cryptocurrency investing). In the third-quarter, subscription billings amounted to $32.4M which showed an increase of 93% year-over-year, but in terms of total operating profit, MicroStrategy is not a very profitable company: it achieved non-GAAP operating income of only $0.9M in its core software business and revealed a total non-GAAP operating loss of $413.2M in the September quarter. MicroStrategy MicroStrategy has consistently lost money in its software operations this year: the company's total losses year-to-date, on a GAAP basis, amounted to $495.9M, yet the company has no problems issuing more convertible notes in order to buy more Bitcoin. MicroStrategy As part of MicroStrategy’s long-term capital allocation strategy, the company revealed in the third quarter that it was planning to raise a stunning $42B in capital (both equity and debt) in the next three years in order to further accumulate Bitcoin. Since the company currently has a market cap of $95B, MicroStrategy is poised to expand its market value, purely based off of capital raises, by 44% in the next three years. Since MicroStrategy has pursued aggressive actions in terms of raising capital in the last two years, this target of $42B could well be exceeded going forward. MicroStrategy Most recently (November 21, 2024), MicroStrategy raised another $3B in convertible senior notes due 2029, with a 0% interest rate, with an implied conversion rate of 1.4872 shares. This in turn implies an initial conversion price of approximately $672.40 per-share. Going forward, investors must expect more capital raises (both debt and equity) which is going to dilute shareholders. The amount of shares outstanding has increased by more than 500% in the last three years which poses significant dilution for investors. With the amount of shares surging recently, there is also a natural limit as to how much equity a company can sell going forward. Data by YCharts Sustained Bitcoin run could allow MSTR to continue to out-perform Since MicroStrategy's share price, given its large holding in Bitcoin, can now be expected to move in tandem with the Bitcoin price, the company's bitcoin-for-debt strategy could work in the short term, though I would still question the size of the premium investors are paying for shares of MicroStrategy (see next section). MicroStrategy is basically issuing 0% convertible debt, which means the company's bottom line is not affected by its debt raises. In the short term, this strategy could pay off, especially if the Bitcoin price continues to rise. The strategy may also work for MicroStrategy if the company decided to scale back its Bitcoin purchases (unlikely, in my opinion) or decided to monetize its Bitcoin stake... thereby turning unrealized profits into real ones. Since MicroStrategy seems to have taken a long view on owning Bitcoin, I don't expect the company to take a kind of trading approach to its Bitcoin holdings. If the Bitcoin price therefore continues to rally, MicroStrategy could be a big beneficiary and even overvalued shares can remain overvalued for a long time. Details about an emerging, pro-crypto regulatory landscape would likely also help MicroStrategy continue its strong run, although I would still not be comfortable paying MSTR's excessive, implied BTC premium. MicroStrategy is in a bubble and investors don't need to pay a premium for owning BTC Since MicroStrategy owns so many Bitcoins and since the business intelligence business now represents a relatively small part of the company’s valuation, MicroStrategy is now effectively a directional bet on the Bitcoin price. I believe the company is best valued by directly comparing its market valuation with the total value of the company's Bitcoin holdings. Cloud and software intelligence companies often trade at high revenue multipliers, largely because their top-line potential is attractive to investors. Platform businesses also offer investors significant scale benefits, leading to investors valuing their potential for super-charged growth. Microsoft ( MSFT ) or Salesforce ( CRM ), to use just two examples that own cloud-based software platforms, have current year price-to-revenue ratios of 12X and 10X. If we were to apply the average of 11X to MicroStrategy’s software business, which has ~$460M in expected FY 2024 revenue, we would arrive at a valuation of approximately $5.1B. The remaining ~$95B of MicroStrategy's market value therefore reflects the company’s holdings of a total 279,420 Bitcoins. The total implied value per Bitcoin is therefore ~$339,990 which compares to an actual Bitcoin price of $99,000 today. In other words, investors currently pay a massive 243% premium for MicroStrategy's Bitcoin holdings, although they could simply buy Bitcoin themselves on any cryptocurrency platform of their choice. I don’t see a specific reason why owning Bitcoin through a corporation is in any way more useful or valuable for investors compared to owning Bitcoin outright, especially considering that investors buying Bitcoin directly don't have to pay a premium for BTC. The fact that MicroStrategy's share price performance (+568% YTD) has also fundamentally decoupled from the Bitcoin price performance (+134% YTD) is further evidence that shares of MicroStrategy are in a bubble. Risks with MicroStrategy There are a number of risks with MicroStrategy. The first one is that the company is not primarily a business intelligence company anymore, but rather a corporate vehicle to own Bitcoin. Given the high amount of Bitcoin the company owns on its balance sheet, MicroStrategy’s stock is more a proxy on the Bitcoin price and will likely be subjected to considerable volatility. Second, MicroStrategy is issuing so much debt and equity that investors are seeing some serious dilution which erodes their stakes in the company. Third, MicroStrategy's bitcoin gamble has a natural limit which occurs when investors are no longer willing to fund the company's operating losses or new debt offerings. Final thoughts While I am super-bullish on Bitcoin in the long term, there are no scale benefits of owning the digital currency through a corporation and therefore there is no need whatsoever for investors to pay a premium for a corporate-owned Bitcoin stash, certainly not one that is as high as 243%. Bitcoins are limited in supply, which may result in the price of the currency increasing going forward. Investors that want to buy Bitcoin in order to partake in the growth of the cryptocurrency can buy BTC directly. I believe MicroStrategy's aggressive bitcoin gamble has pushed shares into bubble territory and MSTR is highly vulnerable to even a slight pullback in the Bitcoin price.
