- Cryptocurrency expert Michael Saylor transformed a decades-old software company into a bitcoin giant.
- MicroStrategy has more than doubled the returns of Bitcoin and even Nvidia.
- Here’s why stock and bond investors are obsessed with Saylor’s stock.
One of the hottest stocks on the market is a 35-year-old software company valued at $91 billion, even though its core business generated just $116 million in revenue last quarter.
Many of those who have invested in this company may not be familiar with its business intelligence product. All they know is that it is a Bitcoin company, run by one of the company’s assets. the most vocal evangelists.
MicroStrategy (MSTR) is exceptional, in every way. Its return of 584% over the past year is more than double that of Nvidia and far exceeds the underlying bitcoin it hoards. What’s even more fascinating is that executive chairman Michael Saylor is betting everything, from his reputation to his company’s very existence, on a strategy that observers say has never been tried before.
Saylor’s goal seems simple: buy as many bitcoins as possible, before they go up, from $100,000 to $13 million. MicroStrategy made history in 2020 by becoming the first public company to buy bitcoin, and although other companies have started to follow, none are doing so as aggressively.
In the years since, Saylor has navigated further into uncharted territory. After first attracting the interest of those who wanted to gain exposure to cryptocurrencies via stocks, before Bitcoin funds have been approvedMicroStrategy has since moved toward issuing interest-free bonds providing hedged exposure to Bitcoin.
“It’s completely new and innovative because MicroStrategy puts bitcoin in these traditional financial envelopes of… well, it’s a convertible bond, but it’s backed by Bitcoin; well, they’re stocks, but they are backed by Bitcoin,” said Tim Kotzman. , the host of the Bitcoin Treasuries podcast focused on Bitcoin and MicroStrategy, in a recent interview with Business Insider.
Judging by MicroStrategy’s performance, Saylor’s efforts are paying off. Although stocks are well below their all-time high reached in late November, bitcoin itself just passed the six-figure mark for the first time. Its success is so astonishing that it has even attracted the attention of crypto-skeptics.
MicroStrategy did not respond to a request for comment for this story.
At the heart of MicroStrategy’s innovative strategy
Because MicroStrategy’s software business is essentially an afterthought, it cannot be valued based on traditional financial metrics such as price-to-earnings or price-to-sales.
Instead, investors developed new ways to value the company, namely bitcoin per share and mNAV, or the multiple that investors put on the net asset value of its bitcoin.
These measures are rather simple. Bitcoin per share and bitcoin value per share reflect how much bitcoin investors get when they buy a stock of MicroStrategy. The company owns 402,100 bitcoinsor 1.9% of the crypto supply limit of 21 million. So, with a stock price of around $390, each MicroStrategy share provides investors with exposure to 0.0017 bitcoin. This amount of bitcoin is worth $170, which is the value of bitcoin per share. SO, the mNAV of the title is 2.3x.
It may seem strange that investors are paying almost $400 for what is actually $170 worth of bitcoin.
There are several reasons, including the fact that MicroStrategy’s bitcoin count is steadily increasing. One way to look at the stock’s mNAV is that investors are paying a premium because they believe Saylor will eventually more than double his company’s bitcoin stock.
Another reason is that MicroStrategy is essentially “a leveraged vehicle for holding Bitcoin under the guise of a software company,” as Steve Sosnick of Interactive Brokers put it in a message to BI. The veteran strategy chief noted that Saylor’s company borrows money to buy Bitcoin, and that leverage means it goes up or down more than the price of Bitcoin itself, making it a supercharged bet on Bitcoin.
Others echoed this view, including Matthew Sigel, VanEck’s head of digital assets research.
“MicroStrategy is literally borrowing dollars to buy BTC, so it is a leveraged play,” Sigel wrote in an email. “The stock is likely to outperform in bull markets and underperform in bear markets, until enough other companies replicate the playbook and bitcoin becomes more widely adopted.”
“Accretive dilution”: a brilliant flaw or doomed to explode?
But perhaps the best explanation lies in MicroStrategy’s highly profitable decision to issue bonds.
Fixed income investors hungry for yield are seize the company’s convertible debt, even though it earns no interest, because it’s like buying a low-risk option on Bitcoin through MicroStrategy stock that they couldn’t otherwise access.
If shares of MicroStrategy, a proxy for Bitcoin, are higher in four or five years, these investors could get a huge return by buying these shares at predefined prices. Otherwise, bondholders can require the company to repay them in full, according to his terms. They will only lose if the company goes bankrupt, plus the opportunity cost of what they could have done with that money.
For MicroStrategy, this is a no-brainer. The company essentially raises money by issuing shares for more than double the value of its bitcoin, based on its mNAV. This allows Saylor to add even more bitcoins to his stock.
Investors generally hate it when companies aggressively issue new shares because it dilutes their current ownership. But what MicroStrategy does has been described as “accretive dilution“, because issuing shares helps the company buy more bitcoins, thereby increasing its bitcoin per share.
“When they sell the stock for 1.5x, 2x, 2.5x or 3x the net asset value of the bitcoin that the company holds, they are essentially selling $1 bills for $3,” Kotzman explained. “They take that $3, turn around and buy bitcoin for $1. So it’s immediately accretive to every shareholder and every shareholder of MicroStrategy.”
If bitcoin plunges, so will MicroStrategy stock, although the company can simply buy more. The stock is one of the most volatile in the markets, but Saylor and company want it that way because greater volatility attracts even more trader interest.
“The whole, ‘Sell the sizzle, not the steak’ — well, the sizzle is the volatility; the volatility is the vitality; the volatility is the product,” Kotzman said. “Volatility is what attracts traders and arbitrageurs. And the reason they can sell additional shares into the market is because it is immediately accretive.”
This may all seem too good to be true. But there is no guarantee that MicroStrategy will succeed or that bitcoin will continue to rise. In fact, Bitcoin bullish Citron Research recently announced that it short-circuits MicroStrategy.
Regardless, investors should be aware that they are embarking on an extremely volatile journey.
“If you’re panicking and not sleeping well because of MicroStrategy’s volatility, you may need to own more Bitcoin and have that as a base and then build from there,” Kotzman said.
That’s essentially what Saylor does. Kotzman, who owns Bitcoin and MicroStrategy shares, is confident the company’s gamble — and, by extension, his own — will pay off in the long run.