Summary MicroStrategy's valuation has been difficult for the market to determine due to its declining legacy software business and its focus on Bitcoin. The company's premium or discount relative to Bitcoin has historically ranged from 0.50x to over 3x, with the current premium at 1.60x. I anticipate that MSTR will continue to trade at a premium compared to its Bitcoin holdings, as long as the company maintains its focus on increasing BTC per share. MicroStrategy offers a solid entry point for Bitcoin bulls, but those uncomfortable with high volatility should consider alternative options like Bitcoin ETFs. MicroStrategy ( MSTR ) is a difficult company to value. Its legacy software business is declining, and the company has gone all-in Bitcoin since 2020. Perhaps not surprisingly, the market has had a tough time trying to value MicroStrategy in the past, with a very high volatility in its stock. In this article, I will explain what I think about MicroStrategy valuation, its role in a portfolio and who should or should not enter a position at its current price. Nobody seems to agree on MSTR (Seeking Alpha) Thesis: the market will continue struggling with MSTR, yet this remains a solid entry point for those who can handle volatility MicroStrategy is essentially a leveraged bet on Bitcoin, but with an added layer of complexity: the market has never fully understood why or to what extent MSTR should trade at a premium (or discount) relative to Bitcoin ( BTC-USD ). Historically, MicroStrategy has traded with a premium (or discount) ranging between 0.50x and more than 3x relative to its Bitcoin holdings. The premium has turned into a discount during Bitcoin bear runs and has always been positive during Bitcoin bull runs. The premium at the time of writing, at 1.60x, is in the top 30% historically for the past 4 years, but it is significantly lower than the last Bitcoin bull run. For Bitcoin bulls, MicroStrategy at its current price offers a solid entry point. However, if you're not comfortable with high volatility, opting for a Bitcoin ETF is a better choice. I anticipate continued volatility and expect the market to struggle with accurately valuing MicroStrategy. MicroStrategy: a Bitcoin development company Recent articles on Seeking Alpha describe MicroStrategy as a lousy software business that invests in Bitcoin. In my view, the value of MicroStrategy's legacy software business is negligible in the context of its valuation. I see MicroStrategy's software as nothing more than a legacy business. As of 2023 , it generates revenue of less than half a billion dollars (declining 6% year-on-year), with a gross profit of $96 million. Even assuming a generous valuation, this business could be worth $1 to $2 Billion at most. This compares to a market capitalization for MSTR of around $22 Billion at the time of writing. MicroStrategy is marketing itself as the first Bitcoin Development Company, and it is exclusively a Bitcoin company. I would not be surprised if Michael Saylor eventually ends up selling its software business, as he has already resigned as CEO of the company to focus on its Bitcoin bet. Because of these reasons, I will not include MicroStrategy's software business in my analysis. I believe the market also considers this segment negligible and assumes it will either be sold or become insignificant if the company's Bitcoin investment succeeds. Understanding MicroStrategy's Bitcoin strategy and its role in a portfolio Detractors of MicroStrategy might believe that the company is simply an inefficient, highly volatile way to get exposed to Bitcoin. In my opinion, this simplistic view misses MicroStrategy's vision related to its Bitcoin per share. BTC per Share, MSTR (mstr-tracker.com) MicroStrategy is deliberately buying more Bitcoin to boost its Bitcoin per share ratio, currently at 0.012. In this context, the fact that MicroStrategy's shares outstanding are increasing every year is not a concern. The company isn't truly diluting its investors; rather, it's using the funds raised to purchase more Bitcoin, increasing BTC per share. I believe that BTC per Share, in the case of MicroStrategy, is a better indicator than traditional metrics such as Earnings per share. That's because the company is positioning itself as an alternative to Bitcoin ETFs , and effectively a leveraged bet on Bitcoin itself. Buying a share of MicroStrategy today means acquiring not just 0.012 Bitcoin, but also the reasonable expectation that your Bitcoin per share will continue to increase. If you view Bitcoin as the scarcest asset on Earth and are bullish on its long-term value, the prospect of owning an ever-increasing amount of this scarce asset can be highly attractive. Investing in a Bitcoin ETF, such as the iShares Bitcoin Trust ETF (IBIT), presents a very different scenario. When you buy shares of IBIT, the number of Bitcoin represented by your investment will not increase over time. If anything, your holdings will gradually decrease due to the 0.25% expense ratio charged by BlackRock. This dynamic is effectively what the market is discounting, and part of the reason behind MicroStrategy's premium compared to its mere Bitcoin holdings. Understanding the MicroStrategy premium and high volatility MicroStrategy has always traded at significant premium or discount to its Bitcoin holdings. Historically, the company trades at a hefty premium during bull runs and at a deep discount during bear runs. MSTR Premium vs. BTC (mstr-tracker.com) I believe euphoria plays a role in this market dynamic. Markets tend to overestimate future returns in bull markets, while they tend to be overly pessimistic in bear markets. There is irrationality on both sides. However, I also believe that a large part of this premium is justified, and it has to do with MicroStrategy's Bitcoin per share strategy, which I covered in the previous section. MSTR Premium vs. BTC, 2020 to date (mstr-tracker.com) Looking at MSTR in its recent past - from late 2020 to today - the company is currently trading at a 1.6x premium that is significantly below its peaks. The stock consistently traded at a premium above 1.6x for 2020 and the first half of 2021, with peaks at 3x and briefly at 6x. During most of the bear market in late 2021 and 2022, on the other hand, MicroStrategy has traded at a discount compared to its Bitcoin holdings. While the market seems to really be struggling to place a valuation on MSTR, I have no reason to believe this should not continue to be the case for the foreseeable future. If Bitcoin were to experience a continued bull run from its current levels, I can see MicroStrategy stock trading at a significant premium, possibly reaching the same levels it experienced in 2020 and 2021. Short squeeze and stock split MicroStrategy has a significant short interest, currently at roughly 20% . This is another factor that can determine a quick rise in MSFT's premium, should a short squeeze take place as a result of a rise in Bitcoin's prices. However, I personally believe that the high share price - over $1,200 at the time of writing - acts as a barrier to retail investors, potentially limiting the likelihood of a short squeeze. The high cost per share may deter retail investors from buying in. I think MicroStrategy could benefit from (and should consider) a stock split. Such a move would lower the price per share, potentially increasing retail participation. It could also enhance MicroStrategy's position as an alternative to a Bitcoin ETF, making it more accessible and appealing to a broader base of investors. Risks to my thesis and alternatives to get exposure to Bitcoin The most obvious risk to my thesis is that MicroStrategy might stop being valued at a significant premium relative to its Bitcoin holdings. There's a possibility that the company may not be able to continue increasing its BTC per share in the future, and the market may adjust by lowering its premium accordingly. Investors should also be mindful of volatility before investing in MicroStrategy. This stock has experienced high volatility, and I anticipate this will continue in the foreseeable future. Markets can behave irrationally in the short term, whether Bitcoin's price rises or falls from its current levels. An alternative, less volatile way to get exposed to Bitcoin is simply to buy one of the recently launched ETFs. I have recently compared them in an article on Seeking Alpha. The last risk worth mentioning is that related to Bitcoin itself. Bitcoin remains a highly volatile asset, with an unclear role as a possible store of value. Conclusion In this article, I have intentionally avoided discussing the bull or bear case for Bitcoin. Instead, I focused on whether MicroStrategy serves as a sensible option for gaining exposure to Bitcoin. My final recommendation is for investors willing to make a leveraged bet on Bitcoin to consider buying MSTR at its current prices. I do expect this stock to continue trading at a premium relative to its Bitcoin holdings, should a Bitcoin bull run take place in the future. For those who are bullish on Bitcoin but prefer a less risky approach, due to the inherent volatility and risk associated with such an asset, it's advisable to avoid this stock. Instead, they should consider gaining exposure to Bitcoin through one of the recently approved ETFs.
