Summary MicroStrategy's stock has vastly outperformed Bitcoin, driven by its BTC treasury strategy and increased retail interest, not necessarily a short squeeze. The company's "infinite money glitch" involves borrowing at low rates to buy appreciating Bitcoin, leveraging its software business to cover interest payments. The main risk is the company's reliance on speculative Bitcoin interest and the sustainability of borrowing at low rates for continued BTC purchases. Given the 160% premium to BTC holdings, I recommend investing directly in Bitcoin or spot ETFs rather than MicroStrategy at this juncture. Perhaps one of the most interesting assets in the financial markets for followers of Bitcoin ( BTC-USD ) and other cryptocurrencies is the equity in MicroStrategy ( MSTR ). I've covered MSTR a few times for Seeking Alpha and I'm not going to rehash my points about the stock premium to BTC holdings. Last December, I thought the setup for MSTR was one of the best I could find in the equity market. So much so, that I called MicroStrategy my top long idea for 2024 in Seeking Alpha's Long/Short Pick Investment Competition. The stock has nearly quadrupled since that article was published. Data by YCharts Yet, I've missed a large part of this rally because I've felt the large premium to the underlying BTC that the company holds on its balance sheet was unwarranted. That premium is now larger. Given 252,220 BTC on the balance sheet, MicroStrategy's BTC holdings have a market value of $16.6 billion versus a stock market capitalization of $43 billion. Thus, an implied premium of nearly 160%. This premium continues to be the center of much of the debate pertaining to MSTR stock. I'm not going to focus on the premium. Rather, in my updated view on MSTR we'll look at MSTR vs BTC, the long term trend in BTC per MSTR shares, and assess whether it's time to throw caution to the wind and get back on board this 'infinite money' printing train. MicroStrategy vs Bitcoin Data by YCharts Year to date, MicroStrategy stock has vastly outperformed Bitcoin. Since the beginning of the year, MSTR has rallied over 240% while BTC has generated just a 49% return. This out-performance for MSTR has been well-covered at this point. The stock acts as a leveraged play on the coin precisely because of the corporate treasury strategy that MicroStrategy has been operating since it began holding BTC as its primary reserve asset several years ago. What I find to be more interesting is the out-performance for MSTR has started to intensify over the last several weeks: Data by YCharts If we look at MSTR vs BTC on a 6-month chart, the 47% moonshot in MSTR at a time when BTC has been mainly flat to down is nothing short of staggering. What explains this? Some of the sentiment that I'm seeing on places like X seems to imply MSTR is at the beginning of a large short squeeze. While I do think it's plausible that there is a short covering component to this recent rise to some degree, the overall trend in the MSTR short position has already been down for nearly two years: Data by YCharts At the end of 2022, the percent of MSTR shares outstanding sold short was over 30%. Currently, that figure is down to 15%. On the surface, this may look as though shorts have covered half of their position, but that's not the full picture. The shares outstanding figure has increased by 68% over the same time frame. On a split-adjusted basis, there has been very little change in the number of shares that are short: MSTR Short Interest (Nasdaq, Author's calculations) We don't yet know what the short interest is for the first half of October, but as of September 30th, there are 30.7 million MSTR shares sold short. Split-adjusted , this figure is still right in line with where it was in late December and early January. Again, we don't know what this figure will look like yet for the first half of October. But I don't think we can conclusively say a short squeeze is driving this move in MSTR shares relative to BTC. What is more likely in my estimation is MSTR is benefiting from a retail-driven meme trade: MSTR Daily chart w/Retail Trader % (TrendSpider) Retail traders have become a much larger percentage of volume measured through TrendSpider data. At the peak of the March rally, retail percent of MSTR volume hit 1.05. As of October 11th, that figure ripped up to 1.44. For comparison's sake, this is actually much less than the retail percentages that can be observed in other high-flying stocks like Tesla ( TSLA ) or NVIDIA ( NVDA ). But there is a clear spike in retail interest for MSTR and I suspect this is the larger driver of MSTR's recent performance than an active short squeeze. The question is why? Infinite Money Glitch The resumed interest in MSTR shares is perhaps due to greater market acceptance of the company's BTC treasury management strategy. What has been dubbed online as the 'infinite money glitch' is fairly straightforward. MicroStrategy borrows at a low fixed rate cost of capital and pours the borrowed funds into additional Bitcoin purchases. Essentially, creditors are giving MicroStrategy a depreciating asset at a low borrow cost so that the company can continue to buy an asset that historically appreciates at an annualized rate that dramatically surpasses the borrow rate. The advantage that MicroStrategy has is its software business generates cash that can be used to pay off the interest on corporate debt. Historically, this debt has been beneficial to shareholders on a BTC per share basis: Q2 Earnings Deck Slide 6 (MicroStrategy) When adjusting for the company's assumptions on diluted shares outstanding, the net benefit to shareholders is a higher return of value reflected through what MicroStrategy is calling a BTC Yield. The company is projecting this yield to continue higher at an annualized rate between 4-8% between 2025 and 2027. Adjusting for the dollar rise in BTC, BTC per MSTR share has increased by 2.9% year to date per data from BitcoinTreasuries : BTC Holdings Per MSTR Share (BitcoinTreasuries.Net) Frankly, it's a fascinating strategy and it has worked so far; which is undoubtedly why MicroStrategy has gained so much attention in recent weeks. When the MSTR premium runs up, the company raises more capital and buys Bitcoin to bring the share premium back down. It's a compelling flywheel if it keeps working. However, I'm not convinced the company can continue doing this without selling some of its BTC down the line. Risks The obvious risk is the company's equity is more reliant on speculative interest in Bitcoin rather than any underlying business. The less obvious risk is how much longer the company can continue borrowing at such low rates to finance Bitcoin purchases. Q2 Earnings Deck Slide 12 (MicroStrategy) Long-term profitability of the software business is not at all clear, in my opinion. In the last quarter, the company was barely profitable even if you strip out stock-based compensation. SG&A as a percentage of revenue was 63.2% in Q2-24 and is 57% trailing twelve months. The point is, the very dynamic that allows MicroStrategy to do this can't continue in perpetuity. Closing Thoughts I will absolutely own it that I've been wrong on the premium dynamic for MSTR this year. For me, the question when allocating my own capital is what is the better play today having missed out on the rally in MSTR since my article in July. Personally, I think it's wiser to put capital into Bitcoin directly or one of the spot ETFs at this juncture. A 160% premium to BTC holdings via MSTR implies a BTC price of $171k BTC. Assuming BTC gets that high, I suspect the better return from here will be in BTC rather than MSTR. I could certainly be wrong again. But I'd rather buy the asset that I know MicroStrategy will buy than buy MicroStrategy.
