Summary MicroStrategy Inc. has gained attention for using its treasury to buy Bitcoin, led by founder Michael Saylor. The company now holds 226,500 BTC, positioning itself as a significant player in the cryptocurrency market, owning 1% of BTC's supply. The Q2 earnings report highlights their substantial Bitcoin holdings, reinforcing their investment thesis. Introduction MicroStrategy Incorporated ( MSTR ) is a business intelligence (analytics) company that has gained much of its recent fame from its former CEO and founder, Michael Saylor, using the company's treasury to buy Bitcoin en-masse. Since this move, they have begun calling MSTR the first " Bitcoin development company ." Saylor has been hoarding BTC in MSTR since 2020, with a massive rise in its holdings, with its first purchase of BTC in August 2020 for $250M , where they purchased a little over 21,000 BTC. Since then, the stockpile has grown to ten times that. As of earlier this month, when they released their Q2 earnings, they have a total of 226,500 BTC, worth a total of $13.4B . Bitcoin Development Company Data by YCharts Take a look at the chart above to see how close MSTR and BTC have been since 2020. Even with MSTR's recent outperformance, we can see from the amethyst line that the correlation hasn't significantly changed YTD. This non-divergence is indicative that the outperformance has to do with MSTR's leverage and less with BTC's price changing, since it is still following BTC's price fairly closely. It is to note that MSTR owns 1% of BTC's total supply . Bitcoin has a fixed supply, meaning that unless MSTR sells their holdings, this figure will only grow. Financing Bitcoin In hindsight, starting the accumulation of BTC right before it's massive jump and during a period of ZIRP (zero-interest rate policy), was a perfectly timed move by MSTR and has led them to have a fairly low cost-basis. MSTR Cost Basis (8/30/24) Market Price (8/30/24) $36,821 $58,8774 With a gain of over 70% on BTC's market value, MSTR is currently sitting on a $5B unrealized gain on their BTC holdings. The reason why folks might be interested in buying MSTR over directly buying BTC or a BTC ETF is because of its ability to finance its purchases. When interest rates were very low in 2020 and 2021, MSTR began to issue tremendous amounts of debt, with the peak of their net debt issuance hitting $1.2B in 2022. Since the Fed hiked interest rates up at the end of 2021, MSTR has toned down their debt issuance. This year, they have even begun reducing their debt holdings, as you can see in the sapphire line below. Data by YCharts Q2 Saw Two Great Financing Moves One of the things that impressed me with MSTR was its timing. Below is the same chart, but with the SOFR overtop of it. It really shows how well MSTR did to follow the Fed and take advantage of financing. Data by YCharts In Q2 this year, there were some major moves for MSTR's financing. This is the activity that has moved the net debt issuance negative, which, I believe, is a very smart move now that borrowing rates have likely peaked . One of MSTR's financing strategies is to rely on convertible notes as it is easier for them to issue stock instead of cash to creditors, since almost all of their cash is being used to buy Bitcoin. We can see this in the chart below. As much cash as is being raised by financing is going straight into investing. These notes are being used almost exclusively to buy Bitcoin. The actual operational component of MSTR has carried a negative cashflow in its tailing twelve-month figure. Data by YCharts 2032 Convertible Note Issuance Just because the net issuance is negative doesn't mean that there wasn't any issuance at all. MSTR issued about $800M in 2.25% convertible notes due 2032. They carry a conversion price of $204.33 (split adjusted), almost 43% higher than current prices. This falls in line with their 4-8% return trajectory for Bitcoin holdings. I recommend reading this article on MSTR from my colleague Stony Chamber Asset Research about how MSTR calculates and is using "Bitcoin yield" as a new metric. 2025 Convertible Note Redemption In Q2, MSTR sent a notice of redemption to the holders of the 0.75% convertible notes due 2025. In their Q2 earnings report, MSTR IR wrote that: The holders of substantially all of the 2025 Convertible Notes converted such notes into shares of our class A common stock prior to the Redemption Date. This means that closing out the remaining notes was fairly straightforward, and MSTR paid out $650M in shares to creditors. This has allowed MSTR to keep its cash intact, and use it to accrete more BTC. Operations Are Slowing Down Here is a major risk for MSTR shareholders: their actual business is slowing down YoY. The reason for this is unknown to me, but my guess is that MSTR is losing market share among AI cloud providers Data by YCharts I'm guessing this because their results for the past year are in contrast with competing firms like Snowflake ( SNOW ) or Zscaler ( ZS ), which have seen YoY increases in these same categories. These companies also offer analytics and cloud computing interfaces, along with other services more unique to their brands. Data by YCharts That contrast tells us that the change isn't a sector-wide experience, which means that it comes from within MSTR. That is a bad sign for investors and is a major red flag to consider. MSTR may not be a good Bitcoin bet if its actual operations don't add to the company's coffers. Insider Selling There is absolutely no insider buying at MSTR in the last twelve months, so I can only title this section selling. There has been a lot of selling in the last year. Insider Transactions at MSTR (NASDAQ) The bulk of these sales were from Saylor himself, who exercised and sold billions of dollars' worth of stock options. In total, he sold nearly $400M worth of MSTR stock this year . However, his selling spree stopped in April. Since then, Saylor has not exercised any more stock options and is holding on to the remainder of his shares. This selling makes sense on some level, as MSTR's price has dramatically changed in the last few years. It makes sense for folks to trim their holdings, but does not inspire confidence in investors to see nobody on the inside buying. This lack of buying may not be due to a lack of officer confidence. Because these officers are all compensated partially with stock options, their stock portfolios have become primarily MSTR stock. Any financial adviser worth their salt would recommend, at this point, to trim these holdings and diversify away from MSTR. This is doubly true if these folks continue to work for MSTR and receive even more stock options in the future. Data by YCharts Valuation So, MSTR is a tech company that is unprofitable from its operations, but immensely profitable from its investments in Bitcoin. How should we value it? Its current market cap sits at $25B. Remember that they hold almost $13B in Bitcoin, so their operations account for almost a third of their total valuation. Data by YCharts Like most tech companies, MSTR's valuation is incredibly rich. Its ratios across the board are above the sector average. Whether this is justified or not might depend on your view of Bitcoin, since a rise in BTC's price could justify a higher valuation of MSTR even if its operations stagnate. Data by YCharts For this reason, I consider valuation to be a large risk to shareholders, as it seems to be primarily justified by Bitcoin's price, which is something that MSTR has no control over. Conclusion I am not a Bitcoin bull, nor a bear, which makes considering MSTR for my equity portfolio difficult. While I have some stake in Ethereum, which I covered recently , I do not have a stake in Bitcoin. For now, I am going to issue a hold rating for MSTR. Aggressive investors who are bullish on Bitcoin should consider limiting their allocation to less than 5% of an equity portfolio. Conservative investors who are bullish on Bitcoin should limit their allocation to less than 2% of an equity portfolio. Those who are not bullish on Bitcoin should avoid MSTR entirely. Thanks for reading.
