Founded in 1989, MicroStrategy is an American company that provides business intelligence, mobile software and cloud services. Led by Michael Saylor, one of its three co-founders, the company hit its first big hit in 1992 after landing a $10 million deal with McDonald’s.
During the 1990s, MicroStrategy’s revenue grew more than 100% annually as it positioned itself as a leader in data analytics software. The start of the dot.com boom in the late 1990s accelerated the company’s growth, culminating in 1998 when it went public.
And while the company has been a staple of the global business landscape for decades, it wasn’t until it acquired its first Bitcoins in August 2020 that it fell under the radar of the crypto industry.
Saylor made news by making MicroStrategy one of the few public companies to hold BTC as part of their government reserve policy. At the time, MicroStrategy said its $250 million BTC investment would provide a reasonable hedge against inflation and allow it to earn high returns in the future.
Since August 2020, the company has been periodically buying large amounts of Bitcoin, which affects both its share price and BTC.
At the time of MicroStrategy’s first Bitcoin purchase, BTC was trading at around $11,700, while MSTR was trading at approximately $144. At press time, Bitcoin was hovering around $22,300, while MSTR closed the previous trading day at $252.5.
This represents a 75.6% decline from the July 2021 MSTR high of $1,304. Combined with the volatility of Bitcoin prices, the company’s sharp decline in its stock price over the past two years has led many to criticize MicroStrategy’s wealth management strategy and even actively short it.
In this report, CryptoSlate takes a deep dive into MicroStrategy and its holdings to determine whether its ambitious bet on Bitcoin makes its stock currently undervalued.
As of March 1, 2023, MicroStrategy Held 132,500 BTC acquired at a total purchase price of $3.992 billion and an average purchase price of approximately $30,137 per BTC. Bitcoin’s current market price of $22,300 puts MicroStrategy’s BTC holdings at $2.954 billion.
The company’s bitcoins were acquired through 25 different purchases, with the largest being made on February 24, 2021. At that time, the company purchased 19,452 BTC for $1.206 billion when BTC was trading just below $45,000. The second largest purchase was made on December 21, 2020, when it acquired 29,646 BTC for $650 million.
At the time of Bitcoin’s ATH in early November 2021, the 114,042 BTC MicroStrategy held was worth well over $7.86 billion. Bitcoin’s fall to $15,500 in early November 2022 valued the company’s holdings at just over $2.05 billion. At that time, the market capitalization of all MSTR shares reached $1.90 billion.
As CryptoSlate’s analysis showed, it wasn’t until the end of February 2023 that MicroStrategy’s market capitalization equaled the market value of its Bitcoin holdings. The disparity between the two is what has led many to wonder if the MSTR might be undervalued.
However, determining overvalue or undervalue requires more than just looking at MicroStrategy’s market capitalization.
The company has issued $2.4 billion worth of debt to fund its bitcoin purchases. As of December 31, 2022, MicroStrategy’s debt consisted of the following:
- $650 million of 0.750% convertible senior notes due 2025
- $1.05 billion 0% convertible senior notes due 2027
- $500 million of 6.125% senior secured notes due 2028
- $205 million under a secured term loan
- $10.9 million in other long-term liabilities
The interest rates that the company provided for the 2025 and 2027 convertible notes proved to be extremely helpful, especially in light of the recent rising interest rates. However, the benefits MicroStrategy accrued on the convertible notes are offset by the risks it took on its $205 secured term loan from Silvergate Bank in March 2022.
The loan was secured by 19,466 BTC, worth $820 million at the time, with an LTV ratio of 25%. Until maturity in March 2025, the loan must remain secured at a maximum LTV ratio of 50% — if the LTV exceeds 50%, the company will be required to top up its collateral to reduce the ratio to 25% or less.
The crash of Terra in June 2022 caused market volatility, forcing MicroStrategy to deposit an additional 10,585 BTC into collateral. In addition to volatile Bitcoin prices, the floating interest rate on Silvergate’s loan resulted in an annual interest rate of 7.19%, which burdened the company significantly.
The recent Silvergate controversy covered by CryptoSlate has many worried about the future of MicroStrategy’s loan. However, the company noted that the future of the loan does not depend on Silvergate and that the company will continued repayment of the loan even if the bank goes bankrupt.
Of the 132,500 BTC the company holds, only 87,559 BTC are unencumbered. In addition to the 30,051 BTC used as collateral for Silvergate’s secured term loan, MicroStrategy has put up 14,890 BTC as part of the collateral for the 2028 senior secured notes. If the collateral for the Silvergate loan is to be replenished, the company could target 87 559 unencumbered BTC.
Saylor also noted that the company could post other collateral if the price of bitcoin falls below $3,530, which would trigger a margin call on the loan.
One of the biggest stars of the dot com boom, MicroStrategy has seen its stock go through periods of intense volatility in times of expansion.
Since its IPO in 1998, MSTR has seen its price increase by over 1,500%, peaking in February 2000 at over $1,300. After a spectacular price drop that marked the beginning of the dot com crash, it took the company more than ten years to regain the $120 share price it posted in 1998.
Prior to its first Bitcoin purchase in August 2020, MicroStrategy stock was trading at $160. September led to a remarkable rally that pushed its price to a new high of $1,300 in February 2021.
Since then, MSTR has posted a remarkable correlation with Bitcoin price movements, with the company’s performance now tied to the crypto market.
Up more than 68% year-to-date, MSTR has outperformed BTC, which has gained just under 40% in price.
MSTR tracked Bitcoin’s performance on a year-to-date basis as both reported a 46% loss.
Zooming out to a five-year timeframe shows a noticeable correlation in performance, with BTC slightly outperforming MSTR with a 103% increase.
However, MSTR’s market performance has often been overshadowed by MicroStrategy’s deteriorating financials. At the end of the fourth quarter of 2022, the company reported operating loss of $249.6 million, compared to $89.9 million in the fourth quarter of 2021. This brought the company’s total operating loss for 2022 to $1.46 billion.
With an operating loss of $0.46 billion in 2022, a risky loan that may require re-collateralization, and a volatile crypto market behind it, MicroStrategy certainly doesn’t look overvalued.
However, the company’s reported operating loss may cloud its profitability. Namely, the SEC requires companies to report unrealized quarterly losses on their bitcoin holdings as impairment losses. According to MicroStrategy’s bitcoin accounting treatment, the company’s impairment loss adds to its operating loss. This means that a negative change in the market price of Bitcoin shows up as a significant loss in MicroStrategy’s quarterly reports, even though the company has not sold the asset.
On December 31, 2022, the company reported an impairment loss of $2.15 billion on its bitcoin holdings for the year. It reported a pretax operating loss of $1.32 billion.
Given MSTR’s correlation with Bitcoin’s performance, a bull market rally could push the stock back to its 2021 high.
The traditional financial market has historically had trouble keeping up with the rapid growth rate seen in the crypto industry. The kind of volatility that the crypto market is used to, both positive and negative, is still a rare occurrence in the stock market. In an upward rally like the one that took Bitcoin to its ATH, MSTR could significantly outperform other tech stocks, including the FAANG large-cap giants.
However, while MSTR’s growth may mimic the growth seen in the crypto market, it is highly unlikely that the company will see significant volatility in its share price over the next few years. If MicroStrategy continues to service its debt, it will be extremely well positioned to reap the benefits of a crypto-heavy market over the next decade.
Its longstanding reputation may make it a preferred proxy for institutions to tap into Bitcoin, creating demand that keeps buying pressure high.
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