We Need To Talk About MicroStrategy
Ssssh. Did you hear that? In their recent Q3 2024 earnings call MicroStrategy (NSQ:MSTR) announced plans to buy a further $42 billion worth of Bitcoin over the next 3 calendar years. Here are some reflections on where MicroStrategy has come from, and where they are going.
From the beginning
Let’s rewind as to how we got here. Microstrategy is a business intelligence software company originally founded by Michael Saylor in 1989.
They started acquiring Bitcoin in Q3 2020, firstly via their cash reserves on the balance sheet. This was soon followed by debt issuance (mainly in the form of convertible debt), and has in more recent years been followed by issuing further MSTR equity into the market, alongside yet more convertible debt issuance.
Nearly all the proceeds have gone towards buying bitcoin. As can be seen on the chart below, they have managed to steadily grow these holdings, albeit this growth visibly slowed in the last bear market.
MSTR now holds well over 1% of all the Bitcoin that will ever exist. With Bitcoin nearing all time highs again, this Bitcoin is worth around $18.3bn at the time of writing, and has an average purchase cost of around $9.9bn.
This has led to a spectacular share price performance, unmatched in the entire S&P 500 since August 2020.
It was not always this way. When I wrote this article in July 2022, MSTR was firmly in the red and sitting on unrealised bitcoin losses of $1.4bn. A search for Michael Saylor on Twitter back then auto-completed to “Michael Saylor liquidated”.
Rumours of imminent demise were always unfounded since the debt was of long enough term, and with the exception of a small proportion, could not be margin called.
A developing strategy
What’s interesting about MicroStrategy since then is their developing vision as to how to add Bitcoin to their balance sheet and more value to shareholders. This is especially in terms of outperforming BTC and achieving what they define as a “positive BTC yield” – not yield in a conventional sense but a measure of increasing the number of bitcoin held per assumed diluted shares outstanding.
The concept of MSTR outperforming bitcoin is interesting to me, as I’ve previously suggested attempting to value MSTR stock as priced in bitcoin rather than dollars. This then begs the question of whether an investment of bitcoin into MSTR shares will positively perform in bitcoin terms over time.
This valuation is very difficult by its nature, but can broadly be done by adding the bitcoin they currently hold on their balance sheet with an estimate of all the bitcoin they may ever acquire in the future, plus an allowance for other factors such as debt.
The landscape has shifted over this period, with Michael Saylor admitting that their strategy has evolved over time. The vital point that I missed when considering how MSTR might acquire more bitcoin in the future was their ability to issue considerable amounts of new equity into the market and achieve two things in doing so:
i) increasing bitcoin held per share of existing shareholders
ii) strengthen their balance sheet to take on more debt (since further debt issued would be a smaller proportion of their overall balance sheet).
“But where does the (btc) yield come from?”
This is not yield in the conventional sense, but nor is it Terra Luna. Firstly, this could come from profits from the business, which are relatively small. More relevantly, let’s consider how both the capital raises from debt and equity have served to increase the bitcoin held per share.
1. Equity “at the money” offerings
Much has been made of MSTR’s market cap (i.e. the overall value of the shares) trading above “Net Asset Value” (NAV) – which is essentially the value of their current bitcoin holdings plus the value of the conventional business, less debt. A multiple approach is used to describe how far above or below NAV this might be.
At the time of writing, the MSTR market cap stands at around $50bn and the value of their bitcoin holdings at $18bn. Given the conventional MSTR business is relatively small, it’s easy to see how this is approaching a multiple of 3x NAV.
If the share price is $240 and the net asset value is only $80 per share, MSTR can then issue more equity at $240, buy more bitcoin with this, and by doing so increase the bitcoin per share of existing shareholders. What’s more, they can keep doing this as long as the share price remains high. As shown above, MSTR has coined the term “BTC yield” to measure how well they are performing at increasing bitcoin held per share.
2. Convertible Debt
This also generally serves to increase bitcoin held per share. To consider how, let’s consider one of the previous convertible debt offerings – those due in 2028 – works in practice
Amount borrowed – $1,010m
Annual interest rate payable – 0.625%
Conversion price – $183.2
As can see MSTR pays a very low interest rate, as most of the value of the bond is in the potential convertibility to MSTR equity at a price of $183.2. Ultimately there is a binary situation here – either the share price is above that level and they end up issuing more equity at that price, or it’s below, and they end up having simply borrowed money at a very low interest rate.
The crucial point is that the convertible bond conversion price is typically set at a premium of at least 30% to the current market share price, whilst MSTR are buying bitcoin at the outset with the bond proceeds.
Hence if all of this debt converts to equity (and all debt looks like it will at present – see slide below), they are typically managing to increase the BTC held per share for existing shareholders.
This is because in this example when the bonds are converted to shares at $183.2, this is done at a premium to the prior share price (let’s say for illustration it was $140) at which MSTR initially issued the debt and converted the borrowing proceeds to bitcoin.
It is these combined activities that have led to an impressive bitcoin yield of 17.8% for the year to date 2024, and leads to questions for how long this financial alchemy can continue. Some bitcoiners, such as the Quant Bros duo and True North* group (see both here) have spoken of a flywheel effect – the more Bitcoin MSTR can acquire and the higher the bitcoin per share metric goes, the higher the share price, which in turn increases their ability to issue yet more equity and debt to buy more bitcoin and further increase bitcoin per share.
*Side note – Michael Saylor used the phrase “True North” on the Earnings Call; likely not accidental.
One answer to how long this can continue is – as long as the equity and debt markets still show an appetite for snapping up the new debt and equity issuance, even if the share price is high. Michael Saylor characterises it as the beginning of the adoption of Bitcoin as digital capital for these markets, and MSTR constitutes the easiest exposure. They have established a monopoly of sorts – whilst it would feasibly be possible for a large company to catch them in Bitcoin held, it would still have a smaller proportion of its business exposed to Bitcoin than MSTR.
Volatility is vitality
Michael Saylor is very clear in this earnings call and other interviews that MicroStrategy’s share volatility is a feature and not a bug. It is more volatile than any other S&P stock. As can be seen below, the recent daily trading volume only trails to the very biggest companies in the S&P 500.
Saylor embraces this volatility. It is what gives the optionality component of their convertible debt its value, and allows the interest rate payable to be lower. In addition, when the share price is high MSTR can issue more equity and increase bitcoin per share.
The Earnings presentation makes reference to several different forms of Bitcoin exposure that MSTR can offer to the market now and in the future.
The MSTR “True North” Principles
The Q3 Earnings call saw the following principles outlined for the first time. The message is clear to the market – do not conflate the dollar volatility of MSTR’s share price with the nature of their Bitcoin principles, which (perhaps analogous to the Bitcoin protocol itself) are intended to be rock solid and consistent. In addition, Saylor cleared up one source of speculation – MSTR will not be seeking to purchase other companies to add to its potential for generating free cash flows to invest into Bitcoin.
Can’t stop, won’t stop
The Earnings call contained an ambitious plan to raise $42bn more capital over the next 3 calendar years. This would be $21bn worth of equity, by selling new shares into the market (known as an “at the money” equity option), and $21bn worth of fixed income debt. This was split as $10bn in 2025, $14bn in 2026 and $18bn in 2027.
There is no doubting the scale of this ambition – to date MSTR have issued in total around $4.3bn in convertible debt and $4.3bn in terms of issued equity.
One key point is clear in line with the principles listed above. Whilst Saylor wants to raise Capital at opportune times to best benefit shareholders in the long term and to achieve what he terms “intelligent leverage”, he doesn’t try and time his bitcoin buys.
Moreover, he is likely also not bothered that selling so much further equity into the market may not always benefit the share price in the short term.
Turning up the volume, but is anyone listening?
With this announcement of $42bn to come over the next 3 years, there is no end in sight with respect to MSTR’s thirst for further Bitcoin purchases.
And yet, there was little in the media around the announcement, and despite the share price performance topping the entire S&P 500 over the past 4 years, MicroStrategy sits nowhere on Google Trends in comparison to Bitcoin:
For now, this is no Gamestop. There’s no huge amount of short interest, and the fabled retail crowds are nowhere to be seen. One thing’s for sure though. Buckle up.
This is a guest article by Bitcoin Actuary / BitcoinActuary@BitcoinNostr.
Please get in touch with your thoughts and feedback.
The above article should not be construed in any way as investment advice and the opinions expressed do not necessarily reflect the views of The Bitcoin Collective Ltd. The author owns both Bitcoin and shares in MicroStrategy.
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