Summary MicroStrategy's Bitcoin-centric strategy, led by Michael Saylor, offers leveraged exposure to Bitcoin, making it a unique investment opportunity. The company's significant Bitcoin holdings and innovative debt-financed acquisition strategy have driven impressive stock performance, despite poor fundamentals. Inclusion in major indices like MSCI World and potential future inclusions could drive institutional interest and stock appreciation, enhancing MSTR's market presence. High short interest presents the possibility of a short squeeze, potentially fueling further stock gains if Bitcoin continues to perform well. Introduction MicroStrategy ( MSTR ) has attracted considerable attention recently, especially with Bitcoin USD ( BTC-USD ) up over 55% year-to-date. What sets MSTR apart is its bold, unconventional strategy, making it a unique proxy for Bitcoin’s performance. Given this unusual situation, we’ll deviate from our typical structured analysis. Instead of diving deep into industry and financial valuations, we'll focus on MSTR's distinctive approach to Bitcoin: how they acquire it, and whether this strategy can unlock further potential or expose the company to significant risks. After all, an abnormal situation necessitates abnormal actions, right? Just to be clear, we are bullish on Bitcoin , which directly influences our outlook on MSTR. As a major buyer of BTC, the company’s performance is closely tied to the asset’s performance. In this initiation, we’ll then explore Michael Saylor’s leadership and the company’s unique history, and how MSTR has evolved to become the biggest Bitcoin proxy. From there, we’ll evaluate the sustainability of their approach, identify key risks, and mention potential tailwinds that could support the stock. Captain Saylor At The Heart of The Dot Com Bubble Storm Michael Saylor is a remarkable figure in the tech industry. After graduating from MIT with dual degrees in “Aeronautics, Astronautics and Science,” “Technology, and Society” he founded MSTR at just 24 years old. Created in 1989, MSTR focuses on data exploration and management software, with Saylor serving as a CEO from its foundation until 2022 and now as the Executive Director. Often seen with a maquette of a naval ship behind him in his office, Saylor made in 1998 the pivotal decision to take the company public, raising nearly $40 million and holding 39,521 shares valued at $14,482,075, representing almost 36% ownership. Inspired by the booming tech sector, he wanted MSTR to capitalize on the public offerings trend of other software companies during the dotcom bubble. As speculation soared, MSTR's stock skyrocketed. In this period of exuberance, the company even purchased a Super Bowl ad spot in the year 2000. At its peak, Saylor briefly became the richest man in Washington, with a fortune of $7 billion. However, the tide turned dramatically when, in March 2000, the company was asked by the SEC to restate its financial statements for 1998 and 1999 due to accounting errors. This came during a time of widespread accounting scandals, such as those involving Enron and WorldCom. MSTR's stock, initially priced at $14 and soared to $333, plunged by around 91% in just two months after this scandal. First page of the Daily News Published the 21st March 2000 (Daily News) By December 2000, Saylor reached a settlement with the SEC , paying $11 million to resolve the charges. Within a matter of months, he transitioned from being one of America’s richest billionaires to a multi-millionaire. The Bitcoin Strategy - The Sun On The Horizon? On August 11, 2020, things took a massive turn for both Saylor and MSTR as the company bought for the first time 21 454 BTC for $250 million, at under $12,000 each. What could have been considered at that time as a strange anecdotal decision without consequences has turned into what Saylor calls today a “Bitcoin Strategy.” What's the logic behind it? With MSTR sitting on $500 million in cash and interest rates at rock-bottom levels during the pandemic, Saylor anticipated that this era of easy money would devalue the U.S. dollar, potentially sparking inflation. This led him to view Bitcoin’s “reserve of value” characteristics as highly compelling. Since adopting this strategy, MSTR has accumulated over 250,000 BTC, which represents 1.2% of the total Bitcoin supply. MicroStrategy Bitcoin Holdings Evolution (Bitbo) The company acquired these at an average of $39 292.18 per Bitcoin. As of today, Bitcoin trades around $68,000, representing a 73% gain on the company’s Bitcoin holdings. The impact on MSTR’s stock has been impressive, with the share price multiplying thirteenfold and outperforming Bitcoin itself by a factor of 3! Seeking Alpha Fundamentals - Is The Ship Taking on Water? We think that MSTR poor fundamentals characterized by very low top line growth is related to the firm's lack of innovation and its reliance on legacy products. Competitors in the business intelligence space have quickly embraced cloud and AI-driven technologies, while MSTR has been slower to adapt. Additionally, many of its customers still use older, on-premises software, which is less appealing as companies move to modern cloud-based solutions. This slow transition has hurt the firm competitiveness in the market. These difficulties are evident, as shown in the chart below, where revenues have declined over the past three years while the firm has been struggling to remain profitable. Seeking Alpha We don’t expect any substantial improvement in the near future as the management is now focusing only on making MSTR a “Bitcoin company,” making a transition towards BTC related activities. Despite all that, the group is performing well and continues to buy more Bitcoin. It even seems that the more it buys, the better the stock performs. How Is the Ship Not Sinking? By Raising More Debt! As noted earlier, MSTR appears to have steady revenues around $500 million. These revenues and the firm financial situation in 2019 were enough to support the firm first debt issuance. However, since 2019, the company’s long-term debt has increased from zero to $3.7 billion, all related to its Bitcoin-buying strategy. MSTR Long-Term Debt Evolution (Seeking Alpha) Here’s how it works. First, MSTR issues convertible debt. In a convertible debt agreement, a company borrows money, with the understanding that the loan will eventually be repaid by converting it into shares. Once the debt is issued, MSTR uses the proceeds to buy Bitcoin, an asset that has historically shown a long-term upward trend. As Bitcoin appreciates, the company’s intrinsic value and stock price also increase, enabling it to raise even more debt. This cycle continues, and in doing so, Saylor is making a bold move. He is indirectly betting against the U.S. dollars. Why? Because he believes the monetary system is broken that governments are issuing too much debt, and that central banks are flooding the market with liquidity, driving risky assets like Bitcoin higher while devaluating our currencies. It is hard to disagree with him when looking at this famous chart shared on Visual Capitalist . Visual Capitalist As global debt rises, economic growth slows, and central banks keep injecting liquidity, Saylor is taking advantage, and he is willing to pursue this strategy in the future. United Nations The irony? MSTR is only paying 0.625% on its latest $875 million convertible senior notes, due in 2028. The Premium Explained MSTR has been trading at a premium compared to its Bitcoin holdings. Nowadays, this premium is close to 3. It is justified in our view by several factors: First, it isn’t just a Bitcoin holding company, it has a core business in enterprise software which still generates revenues. Second, for many institutional investors, MSTR provides a convenient way to gain Bitcoin exposure on the stock market, especially for those unable to hold Bitcoin directly like many equity fund and portfolio managers. Also, unlike ETFs, which charge fees, a stock doesn’t. Finally, MSTR’s leveraged Bitcoin position enhances potential returns, making it an appealing option for those bullish on Bitcoin’s future. Will The Ship Stay Afloat For Long? We believe that as long as MSTR can borrow at low rates, it can. But there are drawbacks. The biggest one is shareholder dilution. When bondholders convert debt into shares, existing shareholders’ ownership is diluted. However, MSTR has emphasized that as Bitcoin holdings grow faster than the share count, Bitcoin per share is effectively increasing. This metric will be important to follow in the future. Company Presentation Another drawback is the company’s ability to repay its debt. With negative free cash flow, this debt may need to be rolled over with new convertible debt, further increasing leverage, or by issuing more equity, further diluting shareholders. Alternatively, MSTR could sell Bitcoin, which would directly impact both the stock price and the company’s borrowing capacity. It’s a very risky strategy, and MSTR may well be locked in a financial spiral. What If Bitcoin's Price goes down? When looking at MSTR principal debt maturities, the upcoming one will be in 2027. At that time, the company’s stock price would have to be under $143.2 (adjusted for stock split) to put the company in a difficult position. Company Presentation Tailwinds To Move The Boat Forward - Flows and Index Inclusions We believe that as the company’s market capitalization grows, it’s increasingly likely to be included in more equity indices. On May 31, 2024, MSCI, one of the leading index providers, added MSTR to the MSCI World Index , a widely used benchmark for fund managers focused on global funds. This kind of news is important, as fund managers now face the decision of whether to actively bet against the stock by not buying it, potentially risky if the stock were to skyrocket. Even those aiming to neutralize their MSTR exposure would need to buy the stock to match the benchmark exposure, creating positive buying pressure. Even though MSTR weight in this index is residual, it is in our view a first important step for further potential index inclusion and adoption. There have been rumors about MSTR potentially integrating into the S&P 500. In our view, this is unlikely, as the firm does not meet the Financial Viability criteria, which state that a company should have positive earnings in the most recent quarter and over the four most recent quarters to be considered for inclusion in the index. However, we believe that the company meets all the criteria to be potentially listed on the Nasdaq 100 ( QQQM ), which is replicated by several ETFs representing together over $500 billion in AUM. … Despite C annonballs Coming From Short Sellers After the stock's recent rally, MSTR has been heavily shorted. MarketBeat The percentage of shares shorted now represents 17.31% of the free float and is in our view weighting on the stock performance. We have the conviction that should BTC continue to perform, shorts will be in difficult position and might be forced to close their position, leaving even more upward potential for the stock. Conclusion Michael Saylor, the visionary behind MSTR’s transformation, has redefined the company's trajectory through a Bitcoin-centric strategy. For investors like us, who share the conviction that Bitcoin's long-term potential is compelling, MSTR offers a leveraged and distinctive exposure to the asset. While the important debt level poses a risk, particularly if Bitcoin were to experience a sharp decline, we believe the upside remains significant for those prepared to face the volatility. One of the key catalysts for future stock appreciation could be MSTR’s growing presence in major indices. The recent inclusion in the MSCI World Index marks just the beginning of what, we believe, will be further index recognition, driving increased institutional interest. Additionally, the current high short interest presents the possibility of a short squeeze, which could fuel further gains if the stock continues to perform well. Taking these factors into consideration, we initiate on MSTR with a BUY rating.
