MicroStrategy’s Bad Strategy

In 2020, business intelligence firm MicroStrategy (ticker: MSTR), for reasons that are not really understood or clear, made a major pivot to acquiring Bitcoin. MicroStrategy CEO Michael Saylor, who expects a single Bitcoin to be worth millions, initiated the purchases, with MicroStrategy’s total holdings as of March 2021 standing at 90,859 Bitcoin funded with $1.7 billion in unsecured low-interest convertible debt, in multiple purchases throughout late 2020 and 2021. $500 million in Bitcoin was acquired with what appears to be the company’s own money, at around $10,000/Bitcoin in 2020. Tracking all of the purchases is somewhat difficult, but, all together, MicroStrategy acquired the Bitcoin for $2.2 billion, at an average price of $24,000 per Bitcoin.

Michael Saylor has a spotted past. MSTR stock fell 60% in a single day in 2000 after the the company restated earnings from 1998-2000 due to what was chalked up as an accounting error. MicroStrategy executives settled with the SEC in December 2000, paying an $11 million fine and admitting no wrongdoing. That is usually how these things work: break the law and the worst that happens is you get a fine.

Just running through the numbers suggests the possibly of MicroStrategy suffering a repeat crash. Already, MSTR stock has fallen from a high of $1300 to $780 where it trades presently despite Bitcoin recently making new highs above $60,000. So some people who bought MSTR as a proxy for Bitcoin are already deep underwater despite Bitcoin making new highs. But no one in the financial media understands how bad this has the potential to be for MSTR shareholders.

Why does Mike look unhappy in this picture. Is it because he knows his company may soon be worthless?

MSTR has $1.7 billion in debt in the form of convertible bonds to fund Bitcoin purchases. The interest is low but the principle will come due in 2025. The reason why the yields on the MSTR bonds is so low is because Bondholders are sacrificing interest, in exchange for potential upside by converting the bonds into shares of MSTR if a certain price target is met.

So time to do some number crunching. MSTR’s Bitcoin holdings are worth $5 billion at a present price of $56,000. Microstratyegy, the company, is worth $7.5 billion. Before its Bitcoin buying binge, MSTR was worth $800 million. If MSTR was to sell all its Bitcoin now and repay the debt, ignoring any taxes, it would be left with $3.3 billion. Adding the $800 pre-Bitcoin valuation shows that MSTR is trading at a $3.4 billion premium relative to what it’s actually worth. That is pretty extreme and shows that shareholders are very optimistic about the prospects of MSTR and Bitcoin.

What happens if Bitcoin goes to $10k and the premium is erased? Then the Bitcoin holdings are worth $900 million. But MSTR has $1.7 billion in Bitcoin debt. So negative $800 million. The pre-bitcoin value of MSTR is $800 million, so anything below $10k means in theory total liquidation of MSTR. I don’t think MSTR would be worthless under such a scenario, but they would probably be forced to issue a bunch of junk debt to repay the $1.7 billion, and MSTR stock would probably fall to $40 or so, versus $780 now. So pretty bad. Bitcoin has fallen 75% or more before, in 2014, 2011, and 2018, so Bitcoin falling to $10k again is not inconceivable.

You can run these numbers for any Bitcoin target. The combination of the high debt load combined with the loss of premium shows that Bitcoin does not have to fall much for things to get bad quickly.

It’s hard to sufficiently articulate how bad this can get for MSTR shareholders if Bitcoin falls, even just a little, and MSTR stops trading at a large premium. The best hope is that if Bitcoin crashes that MSTR can default on the debt without the company being liquidated and shareholders losing everything given that the debt is unsecured.

No one in the financial media has run this simple calculation that I did. It’s unfathomably stupid (although not surprising given the CEO’s past, and you would think that after being burned once that investors would stay away from MSTR) and unethical of management to make such a stupid gamble (relative to MSTR’s market cap, it would be like Apple taking on $3 trillion of debt to buy something that is highly volatile and already bid up considerably). If I were in charge of MSTR I would dump the Bitcoin pronto and put at least some of the money in a FANG and or diversified large-cap tech (MSFT, FB, TSLA, AMZN etc.) and retail (Nike, Disney, Walmart, McDonald’s) and payment processing (PayPal, Visa, Mastercard) portfolio, which has almost the same upside but considerably less downside risk as Bitcoin. I foresee major shareholder lawsuits on the horizon, the collapse of MSTR stock if Bitcoin falls even to just $20k, and hopefully a long jail sentence for Mike.

Mike’s future strategy: surviving prison