MicroStrategy: Unprofitable software that relies on Bitcoin.
MicroStrategy came of age during the dot-com bubble. It sells business intelligence software but hasn’t had much success in recent years. Despite the huge boom in software-as-a-service (SaaS) companies over the last decade, MicroStrategy’s software segment has struggled. Sales have been stagnating for years and are even declining compared to ten years ago.
The segment is also not consistently profitable. For the first nine months of 2023, MicroStrategy posted an operating loss of $72 million on revenue of just $372 million.
Still, MicroStrategy’s stock is up over 250% in the last five years. Why? One word: Bitcoin. The company’s former CEO, Michael Saylor, has taken a big step towards considering MicroStrategy as an investment vehicle for Bitcoin. According to its latest update, the company held 189,000 Bitcoin on its balance sheet, worth $7.77 billion at the time of writing. Given the enthusiasm for cryptocurrencies among a large portion of the world’s population, it is not surprising that MicroStrategy shares have risen so much in recent years.
ETFs are causing problems for his strategy.
Before these ETFs, it was much harder for people to gain exposure to Bitcoin without paying high trading fees. On platforms like Coinbase, you may have to pay 1% or more of your purchase in trading fees, which can add up if you buy and sell stocks frequently. MicroStrategy, a separate publicly traded company that you can buy through commission-free brokers, ended up being something of a loophole for investors looking to gain exposure to Bitcoin. Why pay a 1% fee to Coinbase when you can get the same Bitcoin exposure by owning MicroStrategy?
Well, that loophole seems unnecessary today with these new ETFs, some of which have annual fees as low as 0.20%. Now anyone can easily invest in Bitcoin, just like with a listed company. With the software business losing money and likely being worth little – if anything – to shareholders, MicroStrategy shareholders are likely questioning their investment in the company.
If you add the debts again, the calculation doesn’t make sense.
Let’s say MicroStrategy was equivalent to a Bitcoin ETF. We can even add that you have confidence in Phong Le as the CEO and that you want to bet on him over the long term. Even if this were the case, MicroStrategy looks overvalued.
|MicroStrategy Net Asset Value
|MicroStrategy Market Cap
|MicroStrategy Premium (discount) to Net Asset Value
His Bitcoin holdings are currently worth $7.77 billion. Its market capitalization is around $7.6 billion at the time of writing, which is slightly less than the spot value of Bitcoin on its balance sheet. But to buy that Bitcoin, MicroStrategy took on $2.1 billion worth of long-term debt, which equates to an estimated annual interest expense of $35.5 million. MicroStrategy will have to pay back that debt at some point (in dollars, I might add). Subtracting this from its Bitcoin holdings, adding the $45 million in cash on its balance sheet, MicroStrategy’s net asset value on its balance sheet is less than $6 billion – much lower than its market cap. And there’s still an unprofitable software company and these interest payments that it has to deal with every year going forward.
Investors pay a significant premium when purchasing MicroStrategy if they want to invest in Bitcoin. With much simpler methods emerging in these Bitcoin ETFs, MicroStrategy shares are likely to run into trouble in 2024. Avoid this stock now – there are much better ways to gain exposure to Bitcoin these days.