MicroStrategy: The Hidden Math Behind Its Bitcoin Holdings
📬Unpacking the numbers behind MicroStrategy's Bitcoin valuation premium
Hi, Investor 👋
I’m Jimmy, and welcome to another edition of our newsletter. Today, let’s dive into one of the most fascinating stories at the intersection of corporate finance and crypto: MicroStrategy. This software company-turned-bitcoin powerhouse is defying norms, riding the Bitcoin bull market to become one of America’s 100 largest companies by market cap. The numbers are astonishing, the strategy is bold, and the risks are just as big.
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MicroStrategy Business Overview
Founded in 1989, by Michael Saylor and Sanju Bansal, MicroStrategy (MSTR) began as a business intelligence (BI) and software company focused on providing tools for enterprise analytics, mobile solutions, and cloud services. For years, its core offerings revolved around helping organizations transform data into actionable insights.
Business Intelligence and Analytics
The company’s flagship platform enables businesses to:
Analyze data with dashboards, visualizations, and reports;
Build predictive models to anticipate trends and uncover opportunities;
Share insights seamlessly across teams through web and mobile tools;
Mobile Intelligence
MicroStrategy developed solutions to bring BI to mobile devices, offering:
Ready-to-use mobile apps for data access on the go;
Customizable applications tailored to unique business needs;
Cloud Services
Its cloud offerings simplify scaling analytics operations by providing:
Rapid deployment with minimal setup;
Advanced security measures to protect sensitive data;
Streamlined processes, reducing operational hurdles for businesses;
Here’s a brief overview of the products offered by the company:
As we can see in the chart below, MicroStrategy's overall revenue has been in a slow but consistent decline since 2019, across almost all major business segments. Interestingly, Subscription Services Revenue bucks the trend, showing a massive 283.34% increase (CAGR of 32.67%), reflecting growth in cloud and SaaS adoption. However, this is not enough to offset the declines in other segments.
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$106 Billion and Counting: The MicroStrategy Transformation
Under the leadership of Michael Saylor, MicroStrategy has undergone a dramatic transformation. A company once worth $1–$2 billion between 2011 and 2020 is now valued at $106 billion, placing it alongside giants like Boeing, Nike, and Starbucks.
How did this happen?
It all began in August 2020, when Saylor announced a bold shift: MicroStrategy would adopt Bitcoin as its primary treasury asset. The company declared its intent to “maximize long-term value” for shareholders by accumulating Bitcoin—and it hasn’t stopped since.
“Bitcoin unites 8 billion people and 100 million businesses, restores rationality to the entire financial system, and returns freedom and property rights to humanity.” - Michael Saylor
As of September 2024, MicroStrategy holds 252,220 BTC, with plans to buy more after recently issuing $2.6 billion in 0% convertible bonds. With over 306,420 BTC expected soon, its holdings are valued at around $30 billion.
But here’s the kicker: MicroStrategy is worth more than triple the value of its Bitcoin holdings. 🪙
The Valuation Gap: Why the Premium?
MicroStrategy’s market cap isn’t just about its Bitcoin stash. The company trades at a 256% premium over the value of its Bitcoin holdings. Why?
Strategic Bitcoin Leveraging
MicroStrategy doesn’t just buy Bitcoin—it uses cheap debt, specifically convertible bonds, to acquire more. These bonds often have interest rates close to zero, like the most recent issue at 0% and another at 0.625%, much lower than traditional loans. This lets the company scale its Bitcoin holdings without significant cash outflows.
Reflexivity and the Bull Market Effect
When Bitcoin’s price rises, so does MicroStrategy’s stock. This creates a feedback loop: MicroStrategy issues debt or equity at high valuations, buys more Bitcoin, and benefits from the price boost that its buying pressure helps create. This “perpetual motion machine” drives the premium further.
A Bet on Leadership and Vision
Investors see Saylor’s strategy as a long-term play on Bitcoin’s potential. His commitment to the cause has turned MicroStrategy into a proxy for Bitcoin investment—arguably riskier but potentially more rewarding.
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Convertible Debt: A Double-Edged Sword
MicroStrategy’s use of convertible bonds is key to its Bitcoin-buying spree, but let’s unpack how it works and why it’s a gamble.
Convertible bonds allow bondholders to trade their debt for company stock at a set price if the stock rises above that level. For MicroStrategy, this has been a win-win:
Low Interest Rates: MicroStrategy’s recent bonds have near-zero interest, much cheaper than traditional debt.
Minimal Cash Outflows: Bondholders trade debt for stock, which dilutes existing shares but doesn’t drain the company’s cash reserves.
However, if Bitcoin enters a prolonged bear market, this strategy could unravel. MicroStrategy’s debt obligations total over $4.8 billion, with most of it coming due between 2027 and 2032. If the stock price falls below conversion levels (ranging from $143 to $672), the company may need to repay bondholders in cash.
And here’s the problem: MicroStrategy’s cash reserves are just $46.3 million. In a bear market, it may need to sell Bitcoin to meet these obligations, reversing its “perpetual motion machine” into a downward spiral. ☸️
Perpetual Motion Machine: How It Works
MicroStrategy’s current valuation reflects what some call a financial “perpetual motion machine.” Here’s how it works:
Bitcoin’s price rises → MicroStrategy’s stock price rises.
MicroStrategy issues debt or equity at higher valuations.
Proceeds are used to buy more Bitcoin, increasing the company’s holdings.
This buying pressure boosts Bitcoin’s price further → stock price rises again.
It’s reflexivity at its finest, but it’s also precarious. If Bitcoin’s price were to crash, this cycle could reverse, amplifying losses instead of gains.
“Reflexivity refers to the circular relationship between cause and effect, where market participants’ perceptions influence market fundamentals, and those changing fundamentals, in turn, shape perceptions.” - George Soros
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The Big Risks Ahead
The strategy has paid off so far, but there are significant risks:
Valuation Disconnect: MicroStrategy’s $70 billion premium over its Bitcoin holdings is largely based on market confidence. If that erodes, the stock could plummet.
Debt Obligations: A prolonged bear market could force the company to liquidate Bitcoin to repay bondholders, which would further depress Bitcoin prices.
Regulatory Challenges: Increased scrutiny on crypto could impact both MicroStrategy and Bitcoin.
Why the Market Backs MicroStrategy
In essence, MicroStrategy’s premium comes down to its ability to benefit from Bitcoin’s bull market and amplify it. As long as Bitcoin rises, the company can continue leveraging its strategy effectively. But if Bitcoin falters, MicroStrategy’s reliance on leverage could become its Achilles’ heel.
For investors, the question is: are you betting on Bitcoin alone, or are you betting on Saylor’s ability to keep the perpetual motion machine running?
If you're interested in understanding Michael Saylor's approach to Bitcoin and his long-term vision for its role in the global economy, I highly recommend watching this insightful interview. It provides a concise yet impactful look at the strategies and principles that guide his decisions:
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Disclaimer
This material is provided for informational purposes only and does not constitute investment advice, a recommendation, or an offer to buy or sell any securities or financial products. All investments involve risk, and it is the responsibility of the investor to conduct their own due diligence and make decisions based on their financial objectives and risk tolerance. Jimmy’s Journal assumes no liability for investment decisions made based on this information.