TOP STORY
😰 MicroStrategy is up 465% this year: is the stock ‘overheated’?

🤯 MicroStrategy ($MSTR) has been one of the best-performing stocks in the market this year, up a whopping 465% year-to-date - double the returns of even Nvidia…

🚀 This has led to an insane amount of hype around the stock across the internet and even in the Blossom community - with the stock ranking as the #7th Most Visited ticker this week, #14th Most Mentioned, and #24th Most Bought.

🚨 But with this massive run-up, many are saying that the stock is now massively overvalued, as for a company whose operations are primarily just holding Bitcoin and buying more Bitcoin by issuing bonds - it’s currently trading at a Market cap of over 2.4x the underlying bitcoin it holds.

👀 So let’s take a look at MSTR, what it is, and the cases for and against the stock amidst its insane rise…

🤔 So what is MicroStrategy?

First off, what is MicroStrategy? Well… it’s a bit complicated.

📊 Founded in 1989 as essentially an analytics software company, MicroStrategy went public in 1998 and was a textbook dot-com bubble stock, soaring from its IPO price of ~$10 to a peak of $314 in March 2000 before crashing more than 99% to less than $3 just a year later…

😳 Between 2000 and 2020, the company survived as a small-cap enterprise software company, never passing more than a $20 stock price and fluctuating between a ~$400M market cap and a $1.5B market cap… but all this changed in 2020 when the founder Michael Saylor made a wild move: pivoting the company’s strategy to become a ‘Bitcoin holding entity.’

💰 Using the $565M in cash the company had on its balance sheet at the end of 2019, over 2020, the company purchased over 70,000 bitcoins - using up over 90% of its cash.

📈 Since at the time Bitcoin ETFs didn’t exist in the US, MicroStrategy became a popular investment as a way to indirectly gain exposure to Bitcoin, causing the stock price to surge (as Bitcoin also surged).

🏦 The Transition to a ‘Bitcoin Bank’

But when the cash from the software business ran out, Saylor wasn’t done buying. In December 2020, MicroStrategy issued bonds to finance more Bitcoin purchases, raising $650M in ‘convertible notes’ to acquire more Bitcoin.

Since then, the company has raised over $6B more from bond offerings, growing its Bitcoin amount to 386,700 - 1.8% of all Bitcoins ever mined.

MicroStrategy's average cost for Bitcoins is $45,000, meaning the company has profited nearly $20B on Bitcoin purchases.

🤔 How Do These Bonds Work?

Most of the bonds MicroStrategy has issued are ‘convertible bonds,’ meaning that, like all bonds, the bondholder is giving the company a loan that earns interest over the bond’s lifetime.

But in this case, when the bond ‘comes due,’ the bondholder can either get their money back or convert the bond to shares (which they would only do if the stock goes up) - meaning the bondholders get a chance of a big upside if the stock soars while also being protected in the case of the stock crashing.

👀 Ok, now that we’ve covered MicroStrategy’s origins and how the company works, let's look at the arguments for/against the stock. But first, a quick word from this week’s sponsor Purpose Investments!

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TOP STORY CONTINUED
🔥 Is MicroStrategy ‘Overheated’ and ‘Detached from Fundamentals’?

🔍 Now that we understand the company a little more, let’s take a look at the stock…

🚨 A little over a week ago, the prominent short-seller Citron Research put out a damning tweet, saying MicroStrategy was ‘detached from BTC fundamentals’ and disclosed a short position on the company.

And Citron isn’t the only one who thinks MSTR is looking a little too good to be true. Here are some of the core arguments against the stock:

❌ Core Arguments Against MicroStrategy

1) Overvaluation / Detached from Fundamentals

• Microstrategy is trading at a significant premium to the net asset value (NAV) of its Bitcoin holdings

• This means that investors are effectively paying $2.4 for $1 worth of Bitcoin, which some argue is difficult to justify when you can just buy Bitcoin directly at no premium

2) Heavily Reliant on Leverage

• When the company is issuing convertible bonds to fund Bitcoin purchases, it’s essentially taking on a massive amount of debt.

• Right now, most of these bonds are ‘in the money’ meaning that the bondholders are better off converting them to stock rather than asking for their cash back, but if Bitcoin’s price declines, this massive leverage could hit MicroStrategy hard (as it did in the 2022 crypto bear market when MicroStrategy fell nearly 90%).

3) Dilution

• As the bonds convert into stock, the number of shares outstanding increases, eroding shareholder value.

Some have gone so far as to say MSTR is essentially operating on ‘ponzi-like’ economics, as its strategy depends on the company maintaining its ‘premium to NAV’, creating a highly speculative dynamic that could crumble it Bitcoin underperforms.

Also, now that Bitcoin ETFs exist in the US, many argue that its much less risky and efficient to buy Bitcoin directly.

✅ Core Arguments For Microstrategy

Now of course, for a stock up 634% in the past year, MSTR has many supporters. Here’s their POV:

🪙 A Leveraged Bitcoin Play

MSTR supporters argue that MSTR is essentially trading like a leveraged Bitcoin ETF, because the company is consistently increasing exposure to crypto, which is not possible in the US through an ETF.

What’s really unique is MSTR’s ability to obtain this leverage. In its most recent bond issuance, MicroStrategy raised $3B with a jaw-dropping zero interest rate and a price to convert the debt into equity at a 55% premium to the current share price.

🎯 Analyst Support

While MSTR has a majority of retail investor ownership (55%), the company is not without support from some institutional analysts.

Bernstein recently raised its price target on MSTR from $290 to $600 and Canaccord from $300 to $510, with Bernstein saying it ‘expects MicroStrategy to own 4% of the world’s bitcoin supply by 2033.’

MSTR supporters say the core metric that matters for the company is ‘BTC accretion per share’ or, essentially, how many bitcoins each share owns.

Since MSTR’s leveraged mechanism is causing this number to rise, analysts argue this justifies the company’s premium to BTC:

💡 Summary + My Thoughts

My conclusion on all this is simple: MicroStrategy is incredibly risky. At best, it’s essentially a leveraged Bitcoin ETF. At worst, it’s a Ponzi-like structure built on ‘greater fools’ buying in at increasingly higher premiums to Bitcoin.

If you’re highly bullish on Bitcoin, and think a bear market is unlikely, then the stock provides a way to gain leveraged exposure, but just know that if the Bitcoin price starts to fall - MSTR will tumble even faster.

🌼 As always, do your own research, and I’m excited (and curious) to read your thoughts on Blossom! Join the discussion on my post here!

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FROM THE BLOSSOM COMMUNITY
⭐️ Featured Discussions this Week

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