Michael Saylor and Microstrategy are among the few “bear market heroes” that have yet to be killed. Microstrategy is known for its massive Bitcoin bets made not only with cash on its balance sheet but also with debt.
Microstrategy currently holds 130k BTC, which was purchased at a price of approximately $3.98 billion and is now worth approximately $2.08 billion. As of September 30, 2022, MicroStrategy held $2.37 billion in total long-term debt. There has been increasing speculation surrounding Microstrategy's debt structure and whether their software business is profitable enough to repay the debt.
Microstrategy incurred more than $38 million in interest expense, which it is earning from operations. However, looking at operating income from its software business, Microstrategy's profitability has declined significantly.
Fortunately, the company maintains a cash and cash equivalents balance of nearly $67 million, which should support Microstrategy's operations into 2023 if its operating income continues to stagnate.
As stated in the Microstrategy disclosure document, “If our revenues are insufficient to offset our operating expenses, we will not be able to adjust our operating expenses on a timely basis to reflect any shortfall in expected revenues, or we would incur significant impairment losses related to our digital assets, we could incur operating losses in future periods, our profitability could decline, or we could cease to be profitable. As a result, our business, operating results and financial condition could be materially adversely affected.”
Short-term concerns about Michael Saylor and Microstrategy’s liquidity position and its ability to repay debt to maintain its leveraged Bitcoin position appear to be misguided.
Currently, the company has ~85k liquid BTC on its balance sheet to supplement collateral if Bitcoin falls below $13,500 and pushes the LTV of its Silvergate loans above 50%.
A more legitimate concern is the company’s ability to repay its financing in the coming years. The company’s software business will need to improve profitability to do so, assuming the $67 million in cash currently on its balance sheet will be used to buy more Bitcoin or depleted by interest payments, especially between 2025 and 2026 if the maturity date of its 2028 senior secured notes is triggered.