MicroStrategy: Valued At Half Its Bitcoin Treasury (NASDAQ:MSTR)

MicroStrategy’s (NASDAQ: MSTR) market cap is worth roughly 50% of the Bitcoin on its balance sheet. The company’s $ 2.405 Billion in debt, poor year over year revenue growth, and the stock’s torrid volatility have spooked many investors. For prospective shareholders wanting exposure to Bitcoin, I recommend investing However, if you are unable to buy Bitcoin on a cryptocurrency exchange, are highly risk tolerant, and want leveraged long Bitcoin exposure in your traditional or tax-free brokerage account, MicroStrategy might be for you.

Bitcoin On The Balance Sheet

MicroStrategy was the first publicly traded company to put bitcoin on their balance sheet. It has 129,218 Bitcoins in total. Today’s market price of $ 29,000 / BTC values ​​their Bitcoin cache at $ 3.747 Billion. In Q1 2022, MicroStrategy acquired 4,827 Billion Bitcoin at an average price of $ 44,645. With Bitcoin’s price trading at a discount to recent purchases, I will be watching intently to see if management acquires more Bitcoin with debt, cash, or equity.

Management seeks to use their Bitcoin stockpile to improve their software Business by creating a flywheel wherein they capitalize on the headlines generated from Bitcoin purchases to promote its software business. In theory, the growing software business will then create more cash to buy additional Bitcoin or pay off debt acquired by purchasing previous Bitcoins. While this makes sense anecdotally, I would like to see management publish data demonstrating the correlation of new customer growth since establishing their Bitcoin treasury.

Debt

MicroStrategy has $ 2.405 Billion in debt compared to their $ 1.9 Billion market cap and $ 3.747 Billion Bitcoin treasury. The weighted average annual interest rate of their loans is 1.817% or about $ 43.7 Million. In Q1 2022, management acquired new debt on margin to purchase additional Bitcoin Their recent $ 205 Million margin loan, with an LTV of 25%, from Silvergate Capital is collateralized with 19,466 Bitcoins, worth about $ 820 Million at the time of origination. With the price of Bitcoin constantly trending lower, MicroStrategy’s collateral could be in jeopardy.

In the Q1 2022 earnings call, MicroStrategy’s CFO Phong Le mentioned if Bitcoin’s price reaches $ 21,000, there would be a potential margin call. But Phong emphasized they are well capitalized to post more collateral well before that price. This assertion is backed by data. As of the Q1 2022 earnings report, 95,643, or 74%, of MicroStrategy’s Bitcoins are unpledged and can be deployed as supplemental collateral in the event of a potential margin call.

Moving forward, $ 1.7 Billion of MicroStrategy’s debt consists of senior convertible notes which can be transformed to an equity stake. While the convertible notes carry low interest, I am concerned with future shareholder dilution. In the Q1 2022 earnings report, management mentioned they would consider converting these to equity at a favorable stock price.

Revenue And Earnings

Based on the current GAAP accounting regulations, MicroStrategy is required to report unrealized Bitcoin losses as impairment losses, affecting their bottom line. In Q1 2022 MicroStrategy had $ 170.1 Million in Bitcoin impairment losses. This led to a reported non-GAAP Q1 2022 operating losses of $ 155.6 Million and negative EPS of -11.58. The good news is, if you back out the Bitcoin impairment loss, as they never actually sold any Bitcoin, the company has a non-GAAP operating income of $ 14.5 Million.

Continuing on, when looking at MicroStrategy’s growth, it is clear their year over year revenue growth is spotty at best and unsatisfactory at worst. Revenue declined in 2019, 2020, and 2022 and earnings per share declined in 2019, 2021, and 2022. However, because no Bitcoins have been sold by MicroStrategy, the decline in revenue is strictly due to the underlying software business.

Moving forward, management expects revenue growth of greater than 10% for the foreseeable future. Still, their previous 5 years of turbulent results puts them in a show not tell situation. I want to see year over year revenue growth hit their target before I consider buying more shares of MSTR.

Volatility

The price of MicroStrategy is more volatile than that of Bitcoin, presenting more potential downside risk. If you believe Bitcoin is at, or very near, its bottom, MicroStrategy could provide you with more upside potential than Bitcoin. But unless you are confident that the Bitcoin bottom is already in or is very near, I would recommend just buying Bitcoin itself. Afterall, as seen on the chart below MicroStrategy’s stock price has bled 74% against Bitcoin since the crypto euphoria of early 2021.

Bottom Line

I am concerned with MicroStrategy’s debt, shareholder dilution, choppy revenue growth and amplified volatility. But I certainly do not have a crystal ball. If we fast forward to 2030 and Bitcoin’s price is significantly higher than MicroStrategy’s average Bitcoin purchase price, then shares could be greater than they are today. That being said, before I accumulate any more shares, I want to see MicroStrategy improve the debt on its balance sheet without diluting shareholders and I want to see revenue growth consistently meet management’s guidance of 10%.