Summary It’s hard for an old-timer like me to warm to crypto in general and bitcoin in particular. But as I look more analytically, I’m starting to get it, and to respect the field. I’m also developing respect for MicroStrategy, which went all in on a bitcoin treasury strategy in late 2020. Using what it calls “intelligent leverage,” the company has become much more than a passive speculation on bitcoin pricing. The company’s business acumen is worth something, so the stock deserves to sell at a premium to the company’s bitcoin holdings… but I’m undecided on how much the premium should be. The Seeking Alpha community as a whole is Bearish on MicroStrategy (NASDQ: MSTR) and its bitcoin operation. Its overall SA Analysts Rating is “Sell.” I suspect many here agree with Warren Buffett. When it comes to stock picking, I get it. And I, too, am a big fan. But crypto is a deicer matter. In 2018 , Buffett said bitcoin is “probably rat poison squared.” His long-time cohort, the late Charlie Munger, described crypto trading as “just dementia.” As Bitcoin gained ground, Buffett remained opposed. He said, at the Berkshire Hathaway 2022 annual meeting… Now if you told me you own all of the bitcoin in the world and you offered it to me for $25, I wouldn't take it because what would I do with it? I'd have to sell it back to you one way or another. It isn't going to do anything. But today, we have to wonder if he’s starting to soften his stance. Buffett, invested in Nu Holdings, a Brazilian fintech company. Here’s an intriguing 3/26/24 Yahoo! Finance tidbit about that : Nu Holdings, established in 2013, launched the Nucripto platform in 2022, allowing users to trade over 15 tokens. The company’s performance has been impressive, with a 100% market surge in 2023 and another 50% rise in early 2024. This investment success has put Buffett in a tricky position, as Nu Holdings’ performance, up nearly 125% this year, is sharply contrasting with his negative stance on Bitcoin. So, the million dollar (or 10 bitcoin) question is: Might Buffett be evolving regarding crypto. I don’t know the answer. But the fact that I or anyone can even wonder about this without being impaired to the point where one shouldn’t drive… that says something. One thing it says to me is that MSTR seems worth another look. The Company Has Had an Interesting Journey MSTR debuted in 1989 as a business intelligence (BI) software company. It went public on 6/11/98. That was just in time for the dot-com bubble and bust. It had an especially bad early history. On 3/20/00, the bursting of the bubble and an accounting controversy caused MSTR stock to plummet 62%... in just that one day! The SEC got involved . Fines and disgorgement (of allegedly improper profits) resulted. Some divestitures followed. But eventually in 2011, something good happened. The company expanded its software offering to the cloud. MicroStrategy 2020 , the newest release, debuted in February 2020. And then, everything changed… Here is how MSTR explained things on page 10 of its 2021 10-k: In September 2020, our Board of Directors adopted a Treasury Reserve Policy… that updated our treasury management and capital allocation strategies, under which our treasury reserve assets will consist of *cash and cash equivalents and short-term investments (“Cash Assets”) held by us that exceed working capital requirements; and * bitcoin held by us, with bitcoin serving as the primary treasury reserve asset on an ongoing basis, subject to market conditions and anticipated needs of the business for Cash Assets. **** In 2021, we determined to adopt, in addition to and in conjunction with our Treasury Reserve Policy, a business strategy of purchasing bitcoin, and we may from time to time, subject to market conditions, issue debt or equity securities in capital raising transactions with the objective of using the proceeds to purchase bitcoin. **** We view our bitcoin holdings as long-term holdings and we do not plan to engage in regular trading of bitcoin or to hedge or otherwise enter into derivative contracts with respect to our bitcoin holdings, though we may sell bitcoins in future periods as needed to generate cash for treasury management and other general corporate purposes. MSTR is still in the BI software business. But this operation remains in the red. And it has a minuscule 1.24% market share . (The leader, Notion, has a 21.95% share.) By now, the bitcoin activities are heavily overpowering the software operation. The latter may yet gain relevance going forward in connection with Bitcoin. I’ll address that below. For now... The Investment Case Around MSTR Relates to What it’s Doing with Bitcoin Think of MSTR as an asset play-plus. The asset is, of course, bitcoin. We’ve seen asset-oriented companies before. Banks hold loans. Energy and mining companies hold reserves. REITs hold real estate. Business Development Companies (BDCs) hold often-private business investments. And MSTR holds bitcoin. MSTR is presently noteworthy in that its asset doesn’t generate current income. (Bank loans and investments, by way of contrast, generate interest income. REIT properties generate rent. Energy companies regularly sell product they extract from their reserves.) MSTR doesn’t presently generate income from its bitcoin “reserves.” But that may soon change. FASB (the Financial Accounting Standards Board, which sets accounting rules) just struck a major blow favoring crypto … one that will be huge for MSTR. Up till now, companies holding crypto had to value it at cost minus impairment losses (in other words, they had to write the value of their holding down if the price of crypto declined). But they couldn’t write the assets up when prices recovered. That means MSTR’s historical financials look beyond horrific. It had to recognize market losses. But it couldn’t account for gains. So, MSTR’s balance sheets have drastically understated the real value of the company’s bitcoin holdings. MSTR IR Starting with fiscal years that begin after 12/15/24, crypto can be carried at market value. That means MSTR will keep booking losses… but going forward, it will also be able to book gains as income. This will make MSTR’s future numbers look more reasonable. For now, though, given the accounting rules that governed MSTR’s crypto holdings until now, and the diminished role of the software business, I won’t show any of the financial tables I usually present. (Comparing any MSTR numbers to the Application Software industry medians is meaningless. In fact, I expect data providers to eventually give MSTR a new industry assignment.) But don’t fret. I have plenty with which I can now work. Let’s start by looking more closely on the nature of MSTR’s bitcoin operation. After all, I used the phrase “asset play-plus.” We definitely need to understand why I added “plus.” MSTR’s Bitcoin Operation Take the “plus” in asset-play plus as a hint that we shouldn’t treat MSTR as if it were an ETP (Exchange Traded Product, like an ETF) that holds Bitcoin. It’s not. There’s a also business here. MSTR is a specialized treasury operations business. But it’s a business, nonetheless. MSTR IR Its main thing is buying and mainly holding bitcoins. And it’s bought a lot since it adopted this strategy. MSTR IR But it doesn’t just buy willy nilly It does through an approach it calls “intelligent leverage.” It’s about how management chooses to fund its bitcoin purchases. It does so by issuing new debt and/or equity. It aims to increase the number of coins it owns by more than the number of diluted shares. (Use of diluted shares is important. Most of the debt MSTR issues is convertible.) Here’s how it’s done recently. MSTR IR Management tracks its efforts through a metric if calls BTC Yield. This compares change in the number of coins to change in the number of diluted shares. MSTR IR Here’s the historical trend. (KPI stands for Key Performance Indicator). MSTR IR Here are recent BTC yields compared to future target yields. MSTR IR The company plans to raise capital through what it refers to as its “21/21 plan.” Management explains that this is based on the number 42. Start with Douglas Adams’ Hitchhiker’s Guide to the Galaxy . This science fiction multi-media franchise refers to a supercomputer called “Deep Thought.” It spent 7.5 million years calculating “the answer to the ultimate question of life, the universe and everything.” The answer is the number 42. Speaking of 42, management says… It's the sum of 21 plus 21. And we all know that 21 is a magic, a magical number. In the world of Bitcoin, there can only ever be a maximum of 21 million Bitcoins in circulation. MicroStrategy owns about 1.2% of this Bitcoin today. Today, MicroStrategy is announcing its ambitious capital market strategic plan for the next three years, from the years 2025 to 2027, the company is targeting to raise $42 billion of capital, comprised of $21 billion of equity capital and $21 billion of fixed income capital, primarily for the purpose of acquiring Bitcoin. If it were me, I’d have just said the company expects to raise new capital ($42 billion or whatever) allocated 50% to equity and 50% to debt. MSTR IR Whatever… I can be cool. So I’ll go along with 42, split into 21 and 21. MSTR IR Considering that debt is part of the picture, a bitcoin hater can easily panic. “Oh my God! What will happen to MSTR if bitcoin crashes? How will it deal with all that debt?” Answer: The same way a bank would if a bunch of loans went bad or if bonds in which it invests fall. The same way a REIT would if its real estate crashes in value. In other words, MSTR would suffer, and so, too, would its shares. (We’ve already seen that with banks and REITs whose assets went sour.) But it’s not as if MSTR is going way the heck out on a limb (as did banks that loaded up on and clung to long-term fixed-income when rates were near zero without having realized how natural it would be for rate to rise and fixed-income to fall .) A lot of MSTR’s the debt is convertible to equity and carries low interest rates. MSTR IR MSTR IR And now, please refer now back to the above image comparing MSTR to bitcoin ETPs. Notice MSTR hasn’t forgotten it still has a BI software business. It’s not adding much now. But as bitcoin adoption spreads, MSFT’s presence and expertise could boost that operation. For example there’s something out there called the Lightning Network . It’s a allows for peer-to-peer bitcoin transactions that are initially done off (or, rather, “on top of”) the main blockchain. All of them eventually make their way to the blockchain. But this extra layer facilitates fast, even real-time, transfer and secure tracking. MSTR’s software business could eventually become noticeably bigger as it develops offerings based on things like the Lightning Network. All in all, and without even a big software contribution yet, MSTR shares have dramatically outperformed bitcoin since the company got into the area. MSTR IR Comparisons to the S&P 500 and the Magnificent 7 are nice. But I don’t swoon over stuff like that. It was an especially strong period for bitcoin. Who knows if, when or how often that will repeat. The comparison between MSTR and Bitcoin is much more interesting. It’s based heavily on intelligent leverage. And it confirms that MSTR isn’t a passive speculation on bitcoin. The company is running a legitimate bitcoin-based business… and so far, it’s been doing it well. Valuing MSTR Based on Bitcoin’s Current Price Level My usual valuation table would be meaningless given the nature of this situation. So I’ll borrow an idea from my recent Destiny Tech 100 ( DXYZ ) writeup . There, I valued the closed-end fund based on the value of its portfolio holdings. Here, I’m going to value MSTR based on the value of its bitcoin holdings. Author's compilation based on MSTR SEC documents and Yahoo! Finance prices Author's calculations based on MSTR SEC documents and Yahoo! Finance prices There’s the answer. MSTR currently sells at a 237% premium to the value of its bitcoin holdings. If you’ve read my DXYZ reports, you know I said “Strong Sell” for that CEF on 9/11/24 because the stock sold for a 114% premium back then. And on 12/17/24 , I vigorously reiterated my rating given the stock’s wild 991% premium to pro forma net asset value (adjusted to account for a big jump in the value of DXYZ’s Space X holdings). So, you might expect me to say Strong Sell for MSTR. Not quite. Look at the overall 12/31/20-12/19/24 percentage changes in the table above. Notice how the market value of MSTR’s bitcoin holdings and share price walloped the percentage change in the price of bitcoin. Unlike DXYZ, MSTR is not a fund… It’s a business. And its reasonable to for MSTR investors to put a value on the business (intelligent leverage, potential future opportunities for MSTR’s software). So, a premium is warranted here. As you can see from the asset valuation tables above, Mr. Market has usually recognized that, and allowed for a premium, since the company began its bitcoin endeavors. (The 2022 exception is completely understandable. Interest rates rose that year.) Before assessing whether what the current premium means for MSTR shares, let’s consider… The Big Risk – Future Bitcoin Pricing To the casual observer, price movements may seem driven entirely by hope and hype. Although I’m an old timer and not personally a crypto guy, I’ve seen enough in life and in my career to recognize that the area deserves more respect than that. Like everything else, the price of bitcoin reflects the inter-relationship of supply and demand. And again like everything else, we can and should rationally evaluate why supply and demand are what they are. Supply The supply side is clearcut. Bitcoin supply is limited to 21 million coins. It’s beyond the scope of this article to explain all the details. For now, you’ll be fine with a high level sense of the basics. Suffice it to say there are specific rules that determine how many new coins are granted to “miners” who successfully solve the necessary algorithmic puzzle. It started at 50 coins. The amount then halved after each 210,000 new coins. On 4/19/24, the award halved from 6.25 bitcoins to 3.125. In May 2024, there were about 19.7 million Bitcoins in circulation . The mining process will end after another 1.3 million coins are awarded. So Bitcoin is not like a renewable resource. Its supply is limited. Here’s where Bitcoin stands relative to other investable assets. MSTR IR Are you having trouble finding bitcoin? If so, squint at the upper left corner of the heat-map-like image. Bitcoin, as an asset class, is still so small, it’s representation can’t even fill out a full rectangle. (Since that image was generated, bitcoin’s chaptalization moved closer to $2 trillion. But that’s still tiny.) This makes for something very desirable … scarcity! Demand No matter how scarce a resource, its price will stay at zero unless there’s demand. So why would anyone want it? That’s a heck of a question. But it’s not confined to Bitcoin or any other kind of crypto. Why own gold? In 2023, technology accounted for only 6.69% of gold demand. Investment and central banks accounted for 23.32% and 21.25% respectively. How much more practical is that than a bitcoin stash? Even jewelry demand, the remaining 48.74% of demand, is debatable. How much of that is actually worn, and how much is just stashed in a vault. Gold today is about $2,600 per ounce. What might the price be if weren’t in demand by those who don’t actually use it for practical purposes. Desire to Own something just for the heck of it is a long-established bona fide source of demand. Consider, too, art and other collectables. What portion of such an object’s price is based on “I like to look at it.” And for the vast amounts locked away in storage, the desire to own something scarce – without actually using it – accounts for 100% of its value. As a long-ago (1970s) part-time student at the Art Students League of New York , I understand and appreciate the emotional benefits of having a beautiful physical object. But the world has evolved. We’re now also into cyber things. Do you have any physical certificates for the stocks you own? How much cash do you actually carry? Not long ago, collectors paid up for NFTs ( non-fungible tokens … digital art). I personally am not into crypto. But understanding as I do the appeal of scarce things, and the evolution of digital stuff, I won’t sneer at Bitcoin or crypto. I won’t own it. But I won’t disrespect those who do own or want it. So how much real demand is there? Enough today to meet the supply curve at a price of around $96,000 as of this writing. Inflation, for one thing, makes crypto a store of value. And Bitcoin’s very established market and liquidity makes it especially desirable relative to other crypto currencies. The incoming Trump administration figures to be very crypto friendly . Trump even floated the idea of creating a strategic crypto reserve . There’s also the aforementioned accounting rule change that will make MSTR’s future numbers look more reasonable. That’s also likely to boost corporate demand in general. Corporations that want to hold crypto in treasury may become more willing to do so. Also, starting with luxury goods , crypto may gradually find its way into regular commerce. In the short term, crypto is apt to remain very volatile. Increases in interest rates, if thy come, would likely push crypto down. (Carrying costs would rise. And cash yielding investment would become more competitive.) But for the long term, I do envision rising demand for crypto in general and Bitcoin in particular. What to do About MSTR Stock One could argue that changing governmental, regulatory and commercial attitudes toward crypto might justify more than 100%-plus premiums than we’ve seen in the past. Consider, too, that effective 12/23/24, MSTR will join the NASDAQ 100 . Just being part of that index, and the ETFs that track it, will add a new source of passive-investor demand for MSTR shares., The remaining question is whether the now 200%-plus premium is too high. Here’s what Mr. Market is thinking right now. StockCharts.com The stock is losing steam after having had a nice run. The 10-day exponential moving average (EMA) is starting to turn down toward the 50-day EMA. Consider, too, Chaikin Money Flow (CMF) and the Chaikin Oscillator (CO). Both measure which party to trades is more motivated. CMF does it for institutional investors. CO does it for the market in general. Both indicators turned negative. Sellers are now more motivated than buyers. That restrains stock prices. All that is understandable given bitcoin’s recent strength and the stock’s recently rise in the premium relative to its bitcoin portfolio. We’ll need more time to see what a reasonable premium should be. As I’ve said before, my investment stance depends mainly on whether I think a stock will be better than, in line with, or worse than market. Here’s how I apply that to the Seeking Alpha rating system: “Strong Buy” means I see the stock as being better than the market and I’m bullish about the direction of the market. “Buy” means I see the stock as being better than the market but am not confident about the market’s near-term direction. “Hold” means I see the stock as moving in line with the market. “Sell” means I see the stock as being worse than the market but am not confident about the market’s near-term direction. “Strong Sell” means I see the stock as being worse than the market and I’m bearish about the direction of the market. Based on intelligent leverage and potential increased bitcoin demand, I won’t go bearish. But until the market settles into more normal premium based on changing demand dynamics, I won’t go bullish either. So, I’ll stay neutral. So based on this scale, I’m rating MSTR as a “Hold.”
