Summary MicroStrategy's stock is now primarily a bitcoin investment, but it is vastly overvalued compared to the price of bitcoin. The company's operating business is immaterial compared to its bitcoin holdings, and it has a history of missing revenue targets. The stock trades at up to a valuation of $100K per bitcoin, making it more advantageous to buy bitcoin directly. MicroStrategy Incorporated ( MSTR ) has turned from a legitimate data software story to a nearly pure bitcoin investment with extra risk. Now, the prime reason to buy this stock is to obtain access to cryptocurrency at a discount, but this isn't the case after MircroStrategy has surged to $1,250. My investment thesis is Bearish on the stock following the big jump this year in excess of bitcoin prices. Source: Finviz Immaterial Operating Business MicroStrategy originally started down the path as a business intelligence software company supporting bitcoin purchases. Now, the bitcoin valuation is far in excess of the operating business, a business that only produces a small non-GAAP operating profit. The company reported Q1'24 revenues of $115 million, with a small operating profit on a 5.5% decline in revenues. In essence, the operating business is mostly immaterial to the bitcoin investment. In addition, the business took a $192 million digital impairment charge. In essence, the company is worth less due to the costs of running the business. The management team attempts to build a subscription business, but MicroStrategy has generally reported a trend of lower revenues the last decade. Data by YCharts Analysts generally forecast revenue growth for the year ahead, but MicroStrategy just missed Q1'24 estimates by over $6 million. The company has a history of missing targets, including nearly $8 million in the prior quarter. Investors can't assume the business intelligence business grows revenue to $495 million this year, with a forecasted growth of 4% in 2025 to reach $517 million. All About Bitcoin The stock has a market cap of nearly $22 billion, while the bitcoin valuation was just $15 billion at the end of March. MicroStrategy owned 214,278 bitcoin at the end of the quarter when prices were at $71,028 each. Source: MicroStrategy Q1'24 presentation During the quarter, MicroStrategy raised $1.5 billion via convertible debt offerings. The company purchased 25,250 bitcoins during the quarter to reach a total of 214,400 with an average purchase price of $35,180 per bitcoin. The price of bitcoin has only fallen since the end of the quarter. The current price is just below $63K, or down over $8K per bitcoin since the end of March. MicroStrategy only owns $13.5 billion worth of bitcoin now. Source: Coindesk An investor is paying over $7 billion for the operating business with limited value over $1-2 billion, if that high. An investor wanting bitcoin would naturally want to own the digital currency at the current price, while an investor is paying the equivalent of nearly $100K per bitcoin in order for MicroStrategy to manage the digital currency. Even worse, the company holds $3.6 billion in debt to accumulate the bitcoins over time. The enterprise value is much closer to $25.5 billion for $13.5 billion in bitcoin assets and an operating business with a small operating profit. While the company spends a long time discussing the benefits of buying bitcoin with leverage to create long-term value, an investor has no reason to buy MicroStrategy over buying the digital currency directly. An investor is in essence buying a bitcoin trader constantly raising capital via debt and equity with the share value based on the sentiment of investors as much as the price of bitcoin. An investor can just buy bitcoin directly and benefit off the actual prices. MicroStrategy is likely to see a much bigger dip on lower bitcoin prices. During the last bitcoin plunge in 2021, the stock fell 89% from the peak on February 9, 2021 to the end of 2022. Bitcoin slumped from basically $65K to $15K during the period for a 77% hit Data by YCharts MicroStrategy would only make sense as an investment as a play to acquire bitcoin below market value due to the confusing corporate structure. Instead, investors are actually assigning a vastly higher valuation to the business than the bitcoin owned. Investors have already felt the pain of overpaying for the assets owned, with the stock falling from nearly $2,000 to the current price of $1,245 despite just a minimal dip in bitcoin. Takeaway The key investor takeaway is that MicroStrategy isn't priced correctly for the assets held by the company. The stock is valued far in excess of the price of bitcoin, making any investment in MicroStrategy at this price unappealing. An investor interested in bitcoin should just buy the digital currency directly at a better price.
