Right now, there’s a common thread going around online that MicroStrategy (NASDAQ: MSTR) – the largest corporate bitcoin holder has figured out the “money glitch” with its approach to its “bitcoin strategy” and is on an infinite ride higher.
Every fibre of experience and education says nothing can go up forever… but then again, we’re talking about bitcoin here and its impact on global finance and now big money stock markets.
So… can something go up forever?
The fact is that MSTR stock price has seen a huge run-up – +591% over 12 months – with its market capitalisation reaching around $92 billion.
Some in the market are calling it a Ponzi (we’ve heard that before, some are saying it’s a bubble (heard that too) and some are saying that it will all collapse and go to zero (reoccurring theme here).
But what are you to make of it?
MSTR – A proxy for Bitcoin’s price?
Michael Saylor, MicroStrategy’s billionaire CEO, is now somewhat of a “God” to bitcoiners, and the price action in the company is more exciting than the price moves in bitcoin.
Many argue that he (and his company) is a key driving force behind bitcoin’s rise towards (and ultimately through) the $100,000 mark.
It is now an entrenched part of the crypto world. It pays to understand just what is going on here and whether the sceptics are right.
First off, if you look at the company, it recently announced it bought more BTC, bringing the total to 423,650 BTC. This makes MicroStrategy the largest corporate holder of bitcoin in the entire world.
At a price of just over $98,125 (as I write this) that’s nearly $42 billion worth of bitcoin the company holds.
The rising value of bitcoin directly benefits the company’s stock price due to the perception that MicroStrategy’s value is closely tied to its bitcoin reserves.
But what it’s also actively doing is raising more money to buy more bitcoin to add to its treasury.
MicroStrategy does this by raising capital through equity issuances and convertible debt offerings.
Essentially, it’s using the market’s faith in a longer-term higher price of bitcoin to finance more bitcoin acquisitions.
It’s worth noting that when the company issues new shares of its stock, the money goes into buying more bitcoin, but this process also dilutes holders as it increases the total number of shares, potentially reducing the value of each share unless the price of bitcoin rises enough to offset this.
Thus far, the price of bitcoin offsets this, and by some margin.
Then there’s the debt issuance. Here the company borrows money by issuing bonds that can convert into stock. In fact, it expects it to convert to stock. Its latest offering was a 0% bond (in other words, the buyers get no interest payments at all) but with a conversion price 55% above the purchase price at an implied price of $672.40.
The return from the rise in the stock price is better than the return on normal bonds. Plus, as this continues, MicroStrategy also continues to add bitcoin to its balance sheet, returning what Saylor describes as “Bitcoin Yield”.
MicroStrategy essentially transforms itself into a bitcoin investment vehicle, or a “bitcoin development company” as is often used.
Let me put it to you this way…
Apple is a company that offers products. Those products are devices. If you like them, you buy them. Apple banks the revenues and generates a profit.
Apple reports on this and that eventually flows through to give some kind of determination on the value of Apple. Last quarter Apple made a $14.7 billion profit. The company trades at a price-to-earnings ratio of 40-times which gives Apple a market cap of $3.67 trillion.
MicroStrategy also sells products. Just not the consumer kind. It sells a bitcoin product and the company itself. This product isn’t to everyone’s taste. Those who like it hold a long view on the price of bitcoin and the importance of bitcoin in global finance. These products are bought, and MicroStrategy uses the revenues from these products to buy bitcoin.
That bitcoin it buys is the yield Saylor talks about…
Now, as Saylor rightly points out, the current quarter meant a yield of 88,820 bitcoin. Or at a price of around $98,000, $8.7 billion for the quarter.
You need to rethink your approach to capital here, but that’s over 55% of the profits Apple made for the quarter.
Now MicroStrategy is not currently worth $1.95 trillion. But if you’re of the view that its bitcoin generation for shareholders is the same as profit that Apple generates for its shareholders, then you start to see where some of the crazy bullish takes on the value dynamics of MicroStrategy might lie.
Of course, not everyone sees it that way. And not everyone sees the idea of bitcoin being worth $1 million and more as a feasible reality. Those that do, probably hold MicroStrategy stock.
The stock is then also at the mercy of bitcoin’s movements, the ability to generate this yield ongoing and other factors like market sentiment, short sellers, whether MicroStrategy enters the S&P 500, and other key indexes that result in passive capital flow form index ETFs… a lot of factors really.
Does this make MicroStrategy a good stock to own for the long term?
You can get the answers in our latest issue of South African Investor.
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