Summary MicroStrategy has chosen to invest in Bitcoin instead of buying back shares or issuing dividends, leveraging the company and diluting existing shareholders. The market values MicroStrategy's analytics business at $10 billion, a 75% premium above fair value. The management team's poor execution, including buying BTC at its peak, has hindered the company's ability to maximize shareholder value. Investment Thesis MicroStrategy ( MSTR ) is a dog business that has decided to buy Bitcoin (BTC) instead of buying back shares or issuing dividends. Due to Management’s high conviction in Bitcoin, it has leveraged the company by taking out loans and using the loaned funds to buy Bitcoin in large blocks as quickly as possible. The company has also issued new shares, diluting existing shareholders in the process, to buy more BTC when more debt is too expensive. This attitude and strategy that ignores buying a commodity at a discount has hamstrung MSTR’s ability to maximize its BTC holdings and by extension shareholder value. Valuation Some people struggle with how to value MicroStrategy. There are a few simple ways to do so; Find the fair value of all BTC holdings and then the remainder is the value of the business. Apply a business valuation based on sales, in line with its sector. Then you can tell if the company is overvalued, undervalued, etc. Based on information provided in the latest earnings report on April 29, MSTR holds 214,400 bitcoin as of 4/26/2024. Bitcoin is trading around $60,000 giving their BTC holdings a FMV of $12.864 billion. The current market cap of MSTR is $22.8 billion, meaning the market values the analytics business at about $10 billion. In the annual report issued in February, Total annual sales were $496 million and back in 2021 annual sales were $510 million. Obviously, the underlying analytics business is not growing. The Q1 results show more of the same with Q1 revenue down 5% year over year. Valuing a declining company with half a billion dollars in sales at $10 billion requires a multiple of 20x sales, which in the accounting profession is known as an unreasonable estimate. According to Seeking Alpha’s valuation ratings, the sector median for MSTR’s sector is a P/S multiple of 2.8x. This multiple would value the underlying analytics business at $1.4 billion. This gives MSTR a premium of $8.6 billion or a 75% premium above fair value. Some quick math also shows that if the price of BTC reaches $100,000, MSTR would be fairly valued with its current BTC holdings. For investors, the determining factor of whether MSTR is a good investment at the present comes down to the reader’s expectation of the fair value of Bitcoin. BTC Fair Value & MSTR Fair Value What is the fair value of Bitcoin, that is at what point will BTC reach a price that is stable and lacks the volatile highs and lows it is known for? I believe the answer is to look to gold. In my opinion, Bitcoin and its supporters have already proven the point that BTC is a store of value. If you are one of the few still skeptical of this, my best argument is that the AICPA now provides training to CPAs about bitcoin, and crypto in general. Today Gold has a market cap of approximately $16 trillion. If Bitcoin were to reach the same market cap in the year 2100 when the last bitcoin is mined, we would have a BTC price of approximately $760,000. Another popular tool that Bitcoin enthusiasts tout to show Bitcoin has much further to goo is the bitcoin power law. According to this chart, BTC should be at or above 100k by January of next year, but then it also says by 2040 bitcoin should be valued above $4 million. I personally find that to be a bit too optimistic unless bitcoin develops a real utility for humanity. If BTC hits parity with gold in 2100, the price will be $760,000 but how much BTC might MSTR accumulate by then? I believe 250,000 is a reasonable enough number. MSTR has about $1 million in free cash flow annually to buy BTC. At the current price of 60k that is 16.67 BTC a year, and as the price increases, MSTR will be able to buy less. I also believe their ability to issue new shares in meaningful enough quantities will be limited moving forward due to the desire of investors to make a profit. With all this information together, the expected fair value of MSTR in the year 2100 is $190 billion. This would result in a CAGR of 2.8%from today. Management’s Poor Execution The management team really blew some golden opportunities. They took out billions of dollars in loans to buy BTC and instead of waiting for a dip in his favorite volatile asset, he bought at the peak. While accounting rules will allow them to act as if they bought BTC at the bottom, the reality is they hold significantly less Bitcoin having bought so much at the peak of 2021 that they have permanently removed the possibility of maximizing shareholder value through bitcoin. In 2021, MSTR took out $1.5 billion in secured debt and $1 billion in equity to buy BTC at the top. Had he simply spread that money out equally over 25 months, i.e. $100 million a month in BTC purchases, the total BTC held today would be 237,200 BTC. Recent results show MSTR has not learned from its past mistakes as their Q1 results show they spent $1.4 billion buying 22k BTC. As I stated in articles, I wrote several years ago, I wish MSTR would spread their purchases out over time, instead they choose to execute poorly. For most companies, poor execution becomes a fatal mistake. Opportunities BTC Spike As shown above, the market tends to get ahead of itself when it comes to valuing MSTR. It is currently valued as if BTC were at $100,000. If Bitcoin does have a spike upward in value, it is reasonable to expect MSTR shares to move upward by a similar or larger amount. Currently, buying shares is the best way to play MSTR due to how expensive options are. As stated earlier, MSTR is valued far higher than its current fair value so there is a strong possibility its share price moves down significantly over the next 3 to 6 months. In the current environment, BTC has shown a strong correlation to the broader market in general, and the market has moved into a fearful phase predominantly due to the new expectation the Federal Reserve will have to wait to lower interest rates. BTC Usage If there is a breakthrough in how bitcoin is used, the fair value will rightly increase. If the breakthrough is big enough, the mistakes management has made will be irrelevant to investors. Conclusion Management has shown and continues to show they do not know how to execute a good strategy. If they did, they would probably be able to grow sales for their underlying analytics business as well. Their poor execution will continue to cap the potential rewards for their BTC investments, and perhaps more importantly, their poor execution will allow the underlying analytics business to continue to deteriorate and force a premature selling of its BTC holdings. MicroStrategy is valued significantly above its current fair value. Management’s track record of poor execution will continue to harm the company’s ability to maximize shareholder value, both through BTC investments and through growing their underlying analytics business.
