Microstrategy (MSTR) Analysis: Why Not Buy Bitcoin Directly?

Published connected January 12th, 2025

Microstrategy Was A Dog For Years

For 13 years earlier nan summertime of 2020, nan Microstrategy Inc. banal went virtually nowhere:

But past aft COVID-19, it took disconnected for illustration a rocket-ship and astatine 1 constituent was up 3400% successful little than 4 years (now ‘only’ up 2300%).

What changed? The CEO Michael Saylor started buying Bitcoin for nan firm treasury.

I was instantly reminded of nan 2000 Dotcom Bubble erstwhile stocks started to soar aft putting a “.com” into their names.

I decided to return a gander astatine Microstrategy’s Yahoo Finance statistic page, and was not wholly amazed to spot outrageous statistic for illustration a Price/Sales of 136, meaning that it takes 136 years of revenues to break moreover for nan value presently being paid, and a guardant P/E of 1,250, meaning it would return 1,250 years to get paid backmost successful net for nan existent banal price.

Is it a bubble?

In fact, this banal WAS 1 of nan OG DotCom bubble stocks that soared 3600% successful early 2000 earlier plummeting backmost to world 6 months later and losing 99% for anyone who decided to bargain into nan halfway of mass. If they held connected to that banal it would return them 20 years to recoup their losses! Ouch.

The Microstrategy Performance Mystery

The only point that seemed to person changed for nan banal was that nan institution started to stack Bitcoin into its treasury and they person been buying it for 4 years now. The latest financial filings show that they ain complete 252,000 Bitcoin, but they person purchased much since then, shown later.

For astir of nan past 15 years, it appears that nan institution has technically mislaid much money than they person made:

But upon a deeper dive, you tin spot that these were really recorded losses connected nan worth of their Bitcoin during nan crypto wintertime and nan banal was making meager profits connected nan underlying Microstrategy business for astir of nan different years.

But 1 disconnect is that for nan past 2 years nan underlying business has mislaid money while nan banal value has soared to grounds highs. That’s decidedly not nan norm and nan logic is obvious:

Investors are buying Microstrategy arsenic a proxy for Bitcoin and Bitcoin only.

Now, ignoring nan valuation statistic for a moment, this could person been a reasonable measurement to get vulnerability to Bitcoin a fewer years agone since investors would person been capable to bargain nan banal pinch their existing brokerage accounts and didn’t request to unfastened a crappy Coinbase account, dealing pinch nan hassle of relationship lock-ups and infinite selfies to trade. Also, 1 could bargain nan banal successful an IRA since it was moreover harder to get vulnerability to crypto successful status accounts.

But that’s rather an irrational measurement to get vulnerability to Bitcoin today. Anyone who tin bargain MSTR tin alternatively bargain Bitcoin ETFs that clasp it directly. Dozens of Bitcoin ETFs launched successful Jan 2024.

It sewage maine wondering if possibly nan Bitcoin connected their equilibrium expanse was worthy much than what nan marketplace was assigning to it and that could beryllium nan logic nan banal was soaring. Let maine adhd immoderate context.

The Benefits Come From Buying Under Market Price

Before Grayscale’s GBTC converted to an ETF, I was advising everyone I knew wrong and extracurricular nan WantFI telegram chatroom to bargain it alternatively of nonstop Bitcoin successful 2023. GBTC had a monolithic 50% discount to nan underlying Bitcoin holdings and it was a adjacent certainty that nan SEC would o.k. Bitcoin ETFs wrong a twelvemonth aliases two. Grayscale had besides promised to person their money into an ETF erstwhile allowed to do so, which meant that nan discount would instantly evaporate owed to nan ETF superior structure.

The discount to NAV was for illustration free money laying connected nan crushed waiting to beryllium picked up.

But this is not nan lawsuit for Microstrategy. In fact, it is nan nonstop opposite.

Microstrategy Inc Bitcoin Holdings

Now location is an accounting quirk that Microstrategy uses to worth their Bitcoin holdings connected their equilibrium expanse and it dramatically undervalues their existent worth because it is based connected nan value paid, not what it is presently worth, truthful you can’t usage their SEC filings.

The Price-to-Book worth of 21, shown successful nan Yahoo finance statistic implying that nan the value of their assets is 21 times overvalued, is not real. This is different logic why you can’t trust solely connected financial statistic and must execute owed diligence to understand nan discourse of a institution valuation.

The accounting modular changes successful 2025, truthful this undervaluing rumor will beryllium going distant soon by their adjacent filing and nan Bitcoin will beryllium weighted appropriately.

In Sept 2024, they had 252,220 Bitcoin, but they continuously rumor indebtedness and banal to bargain Bitcoin and successful 3 months they person almost doubled their Bitcoin holdings to 447,470 arsenic of nan latest January figures.

It is weighted astatine $42,051,449,669 astatine today’s prices.

If you disagreement nan worth of Bitcoin by nan number of shares you get a worth of $213 per MSTR share, but location are $4 Billion successful liabilities connected nan past equilibrium expanse (and surely much since they conscionable had a Bitcoin buying blitz) which implies that nan Bitcoin worth of each stock is worthy $191. With a existent banal value of $327, nan ‘real’ price-to-book worth appears person to 1.71, meaning that investors are paying a 71% premium to bargain proxy Bitcoin.

To beryllium fair, nan worth of nan underlying business is worthy something, though it hasn’t had overmuch successful net complete nan past mates of years. Before nan pandemic and their Bitcoin buying spree, their marketplace capitalization was conscionable complete $1.5 billion.

We could get each fancy and effort to worth nan business from a DCF standpoint, but its really a insignificant item opinionated adjacent to nan $42 cardinal pile.

So, if we springiness it a $2 cardinal valuation today, nan ‘real’ worth per stock is $201 per MSTR share, which implies that nan banal is ‘only’ 62% overvalued.

The MSTR End Game

It’s a weird business model.

• Saylor uses nan MSTR firm treasury to bargain Bitcoin
• Investors rejoice and bargain MSTR stock, pushing nan banal higher
• Saylor issues much banal and indebtedness to bargain much Bitcoin, now pinch a higher banal price
• Investors clamor and bargain much stock, pushing nan banal value higher
• the rhythm repeats

Nothing really comes to mind for a nationalist institution that behaves nan aforesaid and it is bewildering to maine why a institution gets massively rewarded for doing thing that an investor tin do connected their ain without a mediate man.

It’s not a Ponzi strategy because investors aren’t getting paid by nan company. They are simply buying and hoping that much group bargain and push nan banal higher than they paid for it. Maybe galore of nan investors don’t cognize what nan worth of nan Bitcoin nan institution holds is worth? Maybe galore of nan investors are conscionable buying nan banal because its capacity has been disconnected nan charts successful caller years?

If you ain MSTR, please adhd a remark to nan bottommost of this article, I’d genuinely for illustration to cognize why you ain nan stock.

Will Microstrategy Implode aliases Go Bankrupt?

It sewage maine reasoning to what would hap if Bitcoin had a accustomed 50% drawdown this year. Would nan banal plummet backmost to earth? Would Microstrategy spell bankrupt? Maybe MSTR is simply a short candidate? About 10% of nan banal is being shorted which implies a batch of group look to deliberation so.

It’s a perfectly expected script that nan banal will plummet if Bitcoin does, but it doesn’t look that Microstrategy itself is astatine consequence of a bankruptcy anytime soon.

As of their latest filing, they person $1 cardinal owed successful astir 2 years and different cardinal nan twelvemonth aft that. But it’s a pittance compared to their $42 cardinal Bitcoin stash. Even if Bitcoin nosedives towards world for illustration an asteroid, they should still person capable worth near to salary this disconnected successful a worst lawsuit scenario.

In a emblematic scenario, I’d person nary uncertainty that they would beryllium capable to refinance this, perchance astatine junk enslaved rates, but surely not a default and a bankruptcy.

Since nan Bitcoin blitz from nan past filing they whitethorn person added astir different $13 cardinal successful indebtedness (we won’t cognize for judge until their adjacent filing), but that still leaves a batch of cushion for nan worth of their holdings moreover if Bitcoin falls disconnected a cliff.

Investors May Get Shafted Though

The building of their indebtedness is an absorbing choice. On 1 hand, nan liking rates attached to convertibles are ace low, making nan indebtedness work exceptionally easy for Microstrategy to manage, but connected nan different hand, it leads to dilution for shareholders erstwhile nan banal goes supra nan conversion prices (if nan enslaved isn’t redeemed beforehand).

There is simply a inducement for insiders to dump their ain holdings of banal earlier a enslaved is converted into much shares and they would person cleanable knowledge of whether to do that since they tin take whether aliases not to redeem nan bonds aliases fto them person into much shares.

As such, nan consequence to Microstrategy is rather low, but to investors, nan consequence becomes exponential nan higher nan banal value goes. The higher it goes, not only is nan investor overpaying for thing they tin bargain straight themselves, but dilution erodes nan underlying worth of Bitcoin per stock making nan over-payment moreover much substantial.

The eventual consequence to this banal is that investors aftermath up 1 time and inquire why they request Microstrategy to bargain Bitcoin for them erstwhile they tin do it themselves. If Bitcoin doesn’t moreover move, expect nan banal to suffer 40% successful that script alone.

Micheal Saylor Has Ultimate Control

Typically being a shareholder gives an investor a sound depending connected really overmuch of nan institution they own. But Microstrategy doesn’t springiness shareholders a sound and Micheal Saylor has eventual control.

We person 2 classes of communal stock: people A communal banal and people B communal stock. Holders of our people A communal banal mostly person nan aforesaid authorities arsenic holders of our people B communal stock, isolated from that holders of people A communal banal person 1 ballot per stock while holders of people B communal banal person 10 votes per share.

As of October 21, 2024, location are 19,640,250 shares of people B communal banal outstanding, which accounts for astir 51.8% of nan full voting powerfulness of our outstanding communal stock. As of October 21, 2024, Mr. Saylor, our Chairman of nan Board of Directors and Executive Chairman, beneficially owned 19,616,680 shares of people B communal stock, aliases 51.7% of nan full voting power.

Accordingly, Mr. Saylor tin power Microstrategy done his expertise to find nan result of elections of our directors, amend our certificate of incorporation and by-laws, and return different actions requiring nan ballot aliases consent of stockholders, including mergers, going-private transactions, and different bonzer transactions and their terms.

Source: SEC Filings

So, you person nary opportunity successful nan result of nan institution moreover if you bargain up each stock trading connected exchanges. Well, that seems fair.

Saylor’s Motivation

This leads maine to different conclusion: Saylor is doing this to enrich himself.

I mean this is not a revolutionary insight, arsenic astir CEOs want to enrich themselves, but usually they are entrepreneurs astatine bosom and really want to create a caller merchandise aliases work to alteration nan world.

Saylor’s banal was worthy a fewer 100 cardinal earlier Microstrategy started buying Bitcoin, but now his allocation is worthy $6.4 billion! That is simply a monolithic windfall for not creating thing caller aliases innovative and doing thing that anyone other tin do.

I’m betting he saw nan stocks for illustration Riot and Long Island Iced Tea that popped successful 2017 from very elemental property releases announcing they were getting into Bitcoin aliases blockchain and wanted to springiness it a go.

Why struggle pinch your halfway business erstwhile you tin conscionable bargain immoderate basking commodity and investors stupidly reward you for it?

Insider Sales

One point you won’t spot is an insider aliases firm head really ponying up money to bargain nan stock. All you’ll spot is simply a oversea of reddish income to nan tune of hundreds of millions of dollars a year. Saylor unsocial cashed retired $400 million successful Q1 of 2024.

Cash retired while you can, right? I don’t blasted them, but location is going to travel a clip erstwhile a batch of inexperienced investors suffer a boatload of money while these insiders were taking their cash.

Saylor Doesn’t Seem Like The Most Standup Guy

In 2024, he had to salary $40 cardinal to settee a taxation fraud case against him for not paying taxes for 15 years.

In 2000, he had to salary an $8 cardinal fine to nan SEC for fraudulently overstating revenues and net for Microstrategy.

Since he has a history of cutting corners, inquire yourself what corners are perchance being trim today? Are immoderate of nan BTC being skimmed disconnected aliases are they reported correctly? Are location immoderate much financial shenanigans? Will Saylor beryllium a bully steward of nan BTC reserves aliases will he usage nan reserves to his advantage?

What if Saylor takes retired a $1 Billion perpetual short position successful BTC and past dumps Microstrategy’s holdings connected nan unfastened marketplace causing nan value to plummet. I don’t deliberation it is simply a bully point that he has power complete arsenic overmuch Bitcoin arsenic he does simply from exploiting unit investor idiocy.

In Closing

I don’t person a position successful this banal 1 measurement aliases nan other. I wouldn’t bargain it because it’s a dumb measurement to bargain a Bitcoin proxy, but I besides wouldn’t short it because Saylor has single-handedly proven that location is simply a never-ending parade of dumb investor money consenting to finance his Bitcoin purchases.

There is going to travel a clip erstwhile Bitcoin is out-of-favor again and nan banal will apt plummet nether nan adjacent worth of its BTC holdings and that mightiness beryllium nan clip to bargain and hold for nan adjacent cycle.

But successful nan meantime, nan only logic investors look to for illustration nan banal coming is because “number spell up.”