MicroStrategy purchased another 1,070 $BTC , bringing #Bitcoin holdings to 447,470 BTC as of January 7, 2025.
While Saylor and MicroStrategy’s approach has been questioned, particularly its premium valuation to net asset value and its equity and debt-funded Bitcoin strategy, much of the#cryptocurrencymarket continues to support the company “for now” with investor confidence, but that may not always be the case. Saylor’s Bitcoin gamble with MicroStrategy is risky at best.
MicroStrategy marked territory as an early and active Bitcoin adopter when the company moved a significant amount of its treasury assets into Bitcoin, thus establishing Bitcoin as the primary reserve asset and beginning its first foray into crypto in 2020. This bold approach was a statement of great belief in the long-term value of Bitcoin and a counterpoint to inflation. MicroStrategy has since bought Bitcoin steadily, building a significant holding that has attracted both respect and distrust.
If Bitcoin falls short of expectations—i.e., fails to reach the “moon”—MicroStrategy could suffer significant financial losses. Bitcoin’s poor performance could result in a significant loss of value in the company’s assets, thereby affecting its balance sheet and perhaps leading to a loss of investor confidence. This could then lead to a decline in MicroStrategy’s stock price, thereby weakening shareholder value and perhaps damaging the company’s financials.
The company has had a cumulative net loss of $1.4 billion since 2000. Its revenue has also deteriorated over the past decade. As a software solutions company, it is a flop. But its CEO, Michael Saylor, has avoided bankruptcy, at least for now.
SimpleVisor shared a valuation analysis of MicroStrategy on December 6, 2024. The bottom line is that investors are paying an exorbitant premium for bitcoin holdings despite some friendly valuation assumptions for its core technology operations. According to the article:
#MSTR has become a tool for leveraged betting on BTC value. The market capitalization of the company gives an idea of the value of the underlying company after deducting the market value of its BTC holdings. When we combine this metric with TTM recurring EPS, we see that the underlying business is trading at an astronomical P/E of 202.5. Similarly, its P/S is “heading for the moon” at 83.4. Next (LON: NXT ), we assume that the appropriate P/E and P/S ratios for the underlying business are 25 and 5, respectively. These are very generous assumptions, given that the underlying business has very little revenue and EPS growth over the long term. Under these conditions, we calculate that the fair value price of MSTR, including the BTC position, is somewhere between $202.45 and $214.67. Therefore, even with generous growth assumptions, investors are paying a premium of 80%-90% above fair value to hold MSTR shares. With both leveraged and non-leveraged Bitcoin ETFs now available on exchanges, it is inconceivable that investors would pay such a premium for MSTR.
Saylor turned a failing tech company into a leveraged Bitcoin holding company.
Over the past five years, MicroStrategy has borrowed $7.27 billion through convertible debt securities and doubled its stock holdings to buy Bitcoin. Those bonds are due to be repaid between 2027 and 2032, and the gamble could be problematic if Bitcoin doesn’t appreciate by then.
In addition to Bitcoin’s performance, more general financial and legal risks should also be considered. The legal landscape for cryptocurrencies is constantly changing and varies greatly across countries. Increased regulatory scrutiny or adverse regulatory changes could limit companies’ ability to operate in the crypto space or impact Bitcoin’s value. Furthermore, factors that affect the stability of the cryptocurrency market could include macroeconomic factors such as inflation rates, currency devaluation, or market crashes.
Given these factors, MicroStrategy's decision to continue investing in Bitcoin carries many potential risks that, if not carefully controlled, could jeopardize the company's long-term survival and financial stability.
If Saylor and Microstrategy’s Bitcoin gamble works, the company will benefit greatly. A significant increase in value for Bitcoin would directly improve the asset base of the business and therefore increase its overall value. This could lead to higher shareholder returns and perhaps even a significant stock price increase. Such a situation would not only validate MicroStrategy’s strategic exposure to Bitcoin, but would also help establish it as a visionary move with a large payoff.
The problem with such a Bitcoin-based plan is that the company has invested all its resources in Bitcoin. A sharp decline in Bitcoin could likely accompany the collapse of MicroStrategy.