MicroStrategy: Now It’s Just Strategy

I first wrote about MicroStrategy last November (Bitcoin Shenanigans). Since the company announced its Q4 earnings call early this month, I thought it would be a good time for an update.

For the last remaining few of you not into crypto, MicroStrategy (MSTR) is a self-styled “bitcoin treasury company,” i.e., it buys crypto and holds it in reserve. Where it gets interesting is how it finances its crypto purchases. Taking a page out of traditional finance, MicroStrategy issues equity and convertible debt and, most recently, a perpetual strike preferred stock offering (debt-like equity with a coupon, in this case 8%, but no maturity date). The company plans on raising $42 billion over the next three years to accumulate bitcoin, the so-called 21/21 plan ($21 billion from issuing equity, $21 billion from issuing fixed income). As of February 2, the company held 471,107 bitcoin at an average of $64,511 each, or $30.4 billion in total. Since the supply of bitcoin is limited, that’s more than 2% of total supply.

What’s new? First, the company decided to rebrand itself as Strategy, which according to them better reflects its focus on bitcoin and AI (the company also sells business software which now has an AI application). Second, for Q4 the company revealed a 3% revenue decrease and $671 million net loss. That makes four consecutive quarters of losses.

And third, Strategy continues to aggressively accumulate bitcoin, and at an accelerated rate. Since October 31, 2023, Strategy’s bitcoin holdings have increased by an astounding 314%. In Q4 2024 alone, they bought $20.4 billion. As of early February, the company has bought bitcoin for the last 12 consecutive weeks; their inventory is now over 7% higher year-to-date.

Here’s the blue whale in the room: at current prices, Strategy has a market capitalization of about $84.5 billion. At the same time, the company’s bitcoin holdings are currently worth about $30.4 billion. Other than bitcoin, there is not much else to the company — the business software division’s contribution is minimal. That leaves the market cap at a little more than $54 billion higher than the company’s bitcoin holdings, or almost 2.8X. Why?

The answers supplied by the company and social media pundits require, frankly, the temporary suspension of disbelief. As I summarized the explanations in my previous note, “some investors can’t buy bitcoin, or can’t buy it in size, or can’t get enough leverage; bitcoin ETFs don’t perform as well as bitcoin and have fees; and the most creative, MSTR is like an oil company that refines crude oil into gasoline, transforming bitcoin into a tradeable asset for institutions.”

Although each of these explanations is true to a certain extent, even taken together they cannot possibly account for the full $54 billion valuation disparity. In companies whose main assets are intangible, e.g., intellectual property or brand, valuations can become excessive because they are subjective. But, Strategy does have a real, physical asset — $30.4 billion worth of bitcoin.

Apparently, either something else is going on here, or MSTR investors just don’t care (after all, it’s not exactly a value stock) and view it as part of a momentum/bitcoin/meme stock strategy. That is, it can be overvalued, and the investment logic might be unclear or inconsistent, but the stock can still go up. Incontrovertibly, MSTR is up 366.4% year-over-year and 11.5% year-to-date. Overvalued or not, those are impressive returns. Other companies are taking notice. Reportedly, 78 of them currently hold bitcoin in inventory.

How does all this stack up? MSTR has two layers of risk. In order: a) the price of bitcoin itself, and b) the overvaluation vs. the company’s bitcoin inventory. If bitcoin ratchets up to make new highs, all will be well — MSTR’s leveraged bitcoin strategy will pay off handsomely and the company’s overvaluation in relation to its inventory will most likely be ignored. However, if bitcoin goes sideways, or especially if it declines sharply, things can get a lot dicier. The worst case is that if bitcoin declines precipitously, and MSTR needs to sell some of its bitcoin holdings to raise cash to service its debt, they could face a liquidity crisis as others in the market do the same. At current valuations, that’s not very likely – MSTR has about $7.2 billion in total debt, compared to $30.4 in bitcoin holdings. A more likely scenario is that MSTR just goes sideways, along with bitcoin. In that case, more investors may start to question MSTR’s valuation.

However you want to spin it, Strategy boils down to a leveraged buy and hold bitcoin strategy. And it’s not just buy and hold – it’s buy and hold forever. Michael Saylor, the CEO (who recently had his picture taken, meme to meme, with Ryan Cohen, of GameStop fame), has stated publicly that he will never sell. Stripped down, Strategy is like a hedge fund that has only one asset in its portfolio, bitcoin. Regardless of how they finance it, or how creative or innovative they are in doing so, or how they package it, they cannot escape that simple fact.

If you believe in Strategy, and trade options, good news – it’s implied volatility has been crashing since it’s glory days earlier in the year. Its current level of under 80% is the lowest it’s been since last Summer.

My general feeling on Strategy is that you either believe in it or not; it’s a perfect encapsulation of crypto. It’s either a giant and complex overvalued leverage scheme that will eventually collapse, or a complex investment that only the brightest and most attuned can fully comprehend. Personally, I lean towards the former, but recognize that overvaluation, or misvaluation, can continue for some time. There is no guarantee that markets have to be rational. They might be, in the long run, but that’s usually longer than anyone can afford.