The stock price volatility of MicroStrategy has also risen, creating a complex market dynamic. This article will explore MicroStrategy's business model and its impact on BTC prices, and analyze the risks and opportunities brought about by the 'Davis Double Play' and 'Davis Double Kill' phenomena. (Background: Reflections and insights from missing out on the soaring MicroStrategy (MSTR) stock) (Context: How long can the 'BTC hoarding trend' inspired by MicroStrategy last in the US stock market?) Last week we discussed Lido's potential benefits from changes in the regulatory environment, hoping to help everyone seize this 'Buy the rumor' trading opportunity. This week, there is a very interesting topic, which is the heat of MicroStrategy; many predecessors have commented on this company's operating model. After digesting and researching, I have some of my own views that I would like to share with everyone. I believe the reason for the rise in MicroStrategy's stock price lies in the 'Davis Double Play', which links the appreciation of BTC with the company's profits through the business design of financing to purchase BTC, and obtains financial leverage through innovative designs that combine traditional financial market financing channels, allowing the company to achieve profit growth beyond the appreciation of its own holdings of BTC. At the same time, as the holding volume expands, the company has a certain pricing power over BTC, further strengthening this profit growth expectation. However, the risk also lies here; when BTC prices experience turbulence or reversal risks, the profit growth from BTC will stagnate, and at the same time, affected by the company's operating expenses and debt pressure, MicroStrategy's financing ability will be greatly discounted, thus affecting profit growth expectations. Unless there is new support to further push up BTC prices, the relative premium of MSTR's stock price to its BTC holdings will quickly converge, and this process is known as the 'Davis Double Kill'. What are the Davis Double Play and Double Kill? Familiar friends should know that the author is committed to helping more non-financial professionals understand these dynamics, so I will replay my own thinking logic. Therefore, I will first supplement some basic knowledge about what the 'Davis Double Play' and 'Double Kill' are. The so-called 'Davis Double Play' is proposed by investment master Clifford Davis, and is usually used to describe the phenomenon of a company's stock price soaring due to two factors in a good economic environment. These two factors are: Company profit growth: The company has achieved strong profit growth, or optimization in aspects such as its business model and management, leading to increased profits. Valuation expansion: As the market becomes more optimistic about the company's prospects, investors are willing to pay a higher price for it, thus driving up the stock's valuation. In other words, the stock's price-to-earnings ratio (P/E Ratio) and other valuation multiples expand. The specific driving logic of the 'Davis Double Play' is as follows: first, the company's performance exceeds expectations, with both revenue and profits increasing. For example, strong product sales, expanded market share, or successful cost control will directly lead to the company's profit growth. This growth will also enhance market confidence in the company's future prospects, leading investors to accept a higher P/E ratio and pay a higher price for the stock, resulting in valuation expansion. This linear and exponential combined positive feedback effect usually leads to an accelerated rise in stock prices, which is known as the 'Davis Double Play'. For example, suppose a company's current P/E ratio is 15 times, and its future profits are expected to grow by 30%. If due to the company's profit growth and changes in market sentiment, investors are willing to pay a P/E of 18 times, then even if the profit growth rate remains unchanged, the increase in valuation will push the stock price significantly higher. For example: Current stock price: $100 Profit growth of 30% means earnings per share (EPS) will increase from $5 to $6.5. P/E ratio increases from 15 to 18. New stock price: $6.5 × 18 = $117 The stock price rises from $100 to $117, reflecting the dual impact of profit growth and valuation increase. The 'Davis Double Kill', on the other hand, is the opposite and is usually used to describe a rapid decline in stock prices due to the joint effects of two negative factors. These two negative factors are: Company profit decline: The company's profitability decreases, which may be due to reduced revenue, increased costs, management mistakes, etc., leading to profits below market expectations. Valuation contraction: Due to declining profits or worsening market prospects, investor confidence in the company's future declines, leading to a decline in its valuation multiples (such as P/E ratio), and thus a drop in stock prices. The entire logic is as follows: first, the company fails to meet its expected profit targets or faces operational difficulties, resulting in poor performance and declining profits. This further worsens market expectations for its future, leading to insufficient investor confidence, and they are unwilling to accept the currently overvalued P/E ratio, only willing to pay a lower price for the stock, thus leading to a decline in valuation multiples and further drops in stock prices. Similarly, to illustrate this process, suppose a company's current P/E ratio is 15 times, and its future profits are expected to decline by 20%. Due to the profit decline, the market begins to have doubts about the company's prospects, and investors start to lower its P/E ratio. For example, the P/E ratio drops from 15 to 12. The stock price may thus fall significantly, for example: Current stock price: $100 Profit declines by 20%, meaning EPS drops from $5 to $4. P/E ratio decreases from 15 to 12. New stock price: $4 × 12 = $48 The stock price falls from $100 to $48, reflecting the dual impact of profit decline and valuation contraction. This resonance effect usually occurs in high-growth stocks, especially evident in many technology stocks, as investors are usually willing to give these companies' future growth higher expectations, but this expectation often supports significant subjective factors, leading to corresponding high volatility. How is MSTR's high premium caused, and why does it become the core of its business model? After supplementing this background knowledge, I believe everyone should generally understand how MSTR's high premium relative to its BTC holdings is generated. First, MicroStrategy has switched its business from traditional software to financing for purchasing BTC, and of course, does not rule out corresponding asset management revenue in the future. This means that the company's profits come from the capital gains of BTC appreciation obtained through diluting equity and issuing bonds. With the appreciation of BTC, the equity of all investors will correspondingly increase, and investors will benefit; in this regard, MSTR is no different from other BTC ETFs. The difference lies in the leverage effect brought by its financing ability, as MSTR investors' expectations for the company's future profit growth stem from the leverage gains obtained from its financing capacity growth. Considering that MSTR's total market value relative to its total BTC holdings is in a state of positive premium, meaning MSTR's total market value is higher than the total value of its BTC holdings. As long as it remains in this state of positive premium, whether through equity financing or convertible bond financing, along with the funds obtained to purchase BTC, it will further increase the equity per share.

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