The Case for Accepting MicroStrategy’s (MSTR) Billion Dollar Bitcoin Gamble
The insatiable Bitcoin-buyer MicroStrategy (MSTR) has seen an impressive rise of over 600% in the past year—a performance roughly 4.5 times greater than Bitcoin’s (BTC) own gains over the same period. However, the rally has faced some headwinds since the end of last year, as MicroStrategy’s stock has struggled to reach new all-time highs—not necessarily due to cryptocurrency price swings but likely because of skepticism over massive equity dilution.
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As I’m cautiously bullish on MicroStrategy, given its brilliant strategy to buy more Bitcoin and capitalize on the hype, I believe that the current NAV premium, at support levels, could be a good entry point in a scenario of ongoing growth for Bitcoin prices.
MicroStrategy’s unique approach works, while share dilution needn’t incite fear for current and new investors. Watch out for MSTR’s earnings call later today after the closing bell. Wall St. analysts expect MSTR to report a loss per share of $0.09 for Q4 2024 compared to an EPS of $0.50. For those looking to gain legitimized exposure to the crypto craze, MSTR and its dazzling strategy are a worthy option.
MicroStrategy’s investment thesis is quite straightforward: it’s a leveraged bet on Bitcoin’s price. Originally a business intelligence and analytics software company under CEO Michael Saylor, MicroStrategy is now the largest holder of Bitcoin in the world, with around 447,470 Bitcoins in its treasury, valued at $46.75 billion.
Over the past few years, MicroStrategy has accumulated this massive amount of Bitcoin through a brilliant strategy consisting of (1) taking on debt and (2) issuing equity to buy more Bitcoin. As the company has capitalized on the high volatility of the leading cryptocurrency, most of its debt is issued through convertible bonds at nearly 0% interest rates, allowing investors to convert their holdings into MSTR stock later, in a form where shareholders are not immediately diluted. In other words, people are lending money to MicroStrategy at no cost, hoping the shares will rise above the conversion price.
Thus, as higher Bitcoin prices increase equity value, it creates a positive feedback loop whereby MicroStrategy can borrow increasingly more capital to buy increasingly more Bitcoin. Arguably, the results have been phenomenal since the company began executing this strategy in 2020. Investors who bought MSTR stock instead of directly purchasing Bitcoin saw returns in excess of 2,000%, compared to Bitcoin’s 1,207% over the same period.
Although justified by its recent strong performance, MicroStrategy’s strategy of acquiring more Bitcoin comes at a cost. This is evident when the company’s net asset value (NAV) in Bitcoin is 1.8x, meaning MSTR investors are effectively paying almost double the value of Bitcoin to gain exposure to Michael Saylor’s active treasury strategy.
The most obvious reaction would be to go short on MicroStrategy based on this relevant premium, and arguably, there is a notable short interest of 10.8% of MicroStrategy’s float being shorted, according to the most recent data. However, what I believe bears are missing at this point is that beyond using available capital and liquidity for opportunistic Bitcoin purchases, MicroStrategy is actually revolutionizing the financial markets by introducing fixed-income instruments with derivative exposure to Bitcoin.
MicroStrategy shares are down around 26% since their last peak at the end of November last year, and even with Bitcoin hitting new highs since then, the stock has failed to achieve the same despite the high correlation.
The recent weakness in MicroStrategy’s stock is likely tied to the potential for a nearly 30x increase in its authorized shares, filed in late December last year and recently approved. The plan details an increase in Class A common stock shares from 330 million to a staggering 10.33 billion—something that initially scared investors about massive dilution.
As part of the company’s strategy, issuing equity is one of the two ways to acquire more Bitcoins. Frankly, dilution is exactly what MicroStrategy’s strategy needs to come to fruition. However, the potential 10.33 billion raised shares will not necessarily be immediately used for new financing potential.
If MicroStrategy converted all the shares at once, or a substantial amount of them, it could potentially raise trillions of dollars if the market had the capacity to absorb the entire share price. Although I don’t see this being feasible in a short space of time, the trend is that MicroStrategy will keep things going with its convertible bonds and at-the-market offerings to make the most out of its shares and gradually raise these potential trillions worth of new shares over the next few years.
But more importantly, in that case, the dilution will only be accretive as long as it provides cheap financing and Bitcoin keeps appreciating.
In my view, such concerns on stock dilution create an opportunity for investors who believe in MicroStrategy’s strategy to buy the stock at an NAV of 1.8x. This level has acted as support over the past year and arguably represents a good entry point, given the further potential upside in Bitcoin in the near term.
As things stand, there isn’t a single Wall Street analyst who isn’t bullish on MicroStrategy stock. MSTR is rated as a Strong Buy, supported by nine Buy recommendations. The stock’s average price target is $557.50 per share, implying a potential upside of 60% from its current price.
MicroStrategy is a Bitcoin proxy with an extraordinarily clever strategy of owning and buying the cryptocurrency by issuing debt and selling equity, capitalizing on the hype. Needless to say, for this strategy to work, Bitcoin prices need to keep soaring. The company’s impressive performance, driven by persistent Bitcoin purchases and share dilution, might raise some doubts; however, if the crypto revolution continues and Bitcoin maintains its status as the leading coin — MSTR’s billion-dollar gamble will pay off handsomely.
While a crypto winter seems unlikely for now, buying MSTR shares at the current NAV premium, likely shaken by somewhat exaggerated dilution fears, seems like a good entry point for investors seeking exposure to Bitcoin.
