Bitcoin has done well for investors during the past three years, recently hitting an all-time high. MicroStrategy (MSTR), which has gone all in on buying Bitcoin, has done even better. During the past three years, the S&P 500 index is up 38%, Bitcoin is up 159%, and MicroStrategy is up almost 860% as of this writing. These are incredible returns in just a few short years, lifting MicroStrategy’s market cap to almost $90 billion.
MicroStrategy’s Bitcoin buying has led to immense wealth generation for its shareholders. Is the party set to continue for the rest of the decade? Let’s lay out some scenarios for MicroStrategy, and where the stock could head in five years.
Aggressive Bitcoin buying strategy
MicroStrategy is a software company that started to use its balance sheet to buy Bitcoin a few years ago. This simple strategy for how to manage treasury reserves has morphed the company into a Bitcoin-buying behemoth that has benefited mightily from the soaring price of Bitcoin. During the past five years, MicroStrategy’s stock is up 2,100%.
As of its latest update in November, MicroStrategy owned 279,420 bitcoins. Using today’s price of about $102,000, these Bitcoin holdings are currently worth roughly $28.5 billion. How did a small software company finance these purchases? Simple: With debt and equity offerings. MicroStrategy has levered its balance sheet and diluted existing shareholders in order to buy Bitcoin.
Its shares outstanding are up 122% during the past five years, as the company used common stock offerings to raise funds for Bitcoin purchases. At the end of last quarter, MicroStrategy had $4.2 billion in debt on its balance sheet. It has taken on much of this debt to load up on more Bitcoin. This is only the beginning of MicroStrategy’s Bitcoin buying plan, at least according to management. It wants to sell $21 billion in equity by selling shares to the public and $21 billion in debt to buy more Bitcoin.
This strategy has worked wonderfully so far. But what happens in a market downturn?
How will things go in a bear market?
Bitcoin has gone through plenty of downturns since its inception roughly 15 years ago. There have been two declines of more than 50% during the past 10 years, with plenty more in the 25% to 30% range.
A prolonged decline — or even just price stagnation — would be a large concern for MicroStrategy. It has convertible notes on its balance sheet that are due in the years 2025-2032. Convertible notes are a type of debt with lower interest rates, but they can also be converted to stock if the share price is above a certain level. However, if the price is below the convert level, the company has to repay the principal on this debt on the due date.
MicroStrategy could get hit with a double whammy if the price of Bitcoin goes down (which it has plenty of times). This would cause a decline in MicroStrategy’s share price, which would bring it below the conversion price for its convertible notes. Then, it would have to obtain cash to repay this debt, with the only assets available being the Bitcoin it has on the balance sheet. This could cause the company to sell its Bitcoin at a discount to repay its debt.
Long story short: MicroStrategy needs the price of Bitcoin to keep rising for its Bitcoin buying strategy to work.
MSTR Total Return Level data by YCharts.
The valuation math is less than ideal
Even if the price of Bitcoin keeps rising, the math around MicroStrategy’s valuation makes little sense.
Today, MicroStrategy has a market capitalization of almost $90 billion. It has Bitcoin holdings worth about $28.5 billion. Subtract out its $4.2 billion in long-term debt, and you have a net asset value (NAV) of $24.3 billion. The market cap of $90 billion is close to 4 times its Bitcoin holdings. The underlying software business isn’t worth much in this equation.
MicroStrategy’s stock price has detached from the assets on its balance sheet. You wouldn’t buy a dollar for four dollars, so why would you buy MicroStrategy at 4 times its Bitcoin holdings? If you want exposure to Bitcoin, buy the asset directly instead.
Avoid buying MicroStrategy stock in your portfolio right now. Perhaps the stock will be higher in five years if Bitcoin keeps surging, but given the detachment from the underlying Bitcoin price, I think it’s likely that the stock will underperform the performance of actual Bitcoin during the next five years. Bitcoin is not guaranteed to rise, either.
Even though the stock has done phenomenally well during the past five years, it looks like a bad bet for investors to make right now.
