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MicroStrategy (NASDAQ:MSTR) appears likely to continue to follow Bitcoin (BTC-USD), and with some leverage to its capricious price changes. If Bitcoin can maintain its recent strength and continue to appreciate, it appears somewhat likely that MicroStrategy could undergo a short squeeze. For these reasons, MSTR appears a reasonable speculation here, and to press that position if Bitcoin appreciates above around $48,800 without MSTR’s short interest collapsing.
MicroStrategy is a business intelligence company that has become a Bitcoin proxy due to its significant Bitcoin holdings. While MicroStrategy does use cash flow from operations to acquire Bitcoin, it also acquired a substantial portion with debt.
At the end of 2021, MicroStrategy held about 124,391 Bitcoins that cost the company around $3.8 billion to acquire. MicroStrategy acquired about 10,349 Bitcoins last quarter, at average purchase price of about $57,113 per coin.
MSTR Bitcoin held by quarter (MicroStrategy)
Within 2021, MicroStrategy acquired 53,922 Bitcoins at average purchase price of about $48,710 per coin. The company had to take about $901 million in cumulative impairment charges due to market pricing at the end of the year. MicroStrategy’s Bitcoin impairment expense for the fourth quarter of 2021 was $146.6 million, which was greater than its total quarterly revenue of $134.5 million.
All this means that the most material matter influencing MicroStrategy’s valuation and reported performance will be Bitcoin’s performance. This is especially the case with reporting when Bitcoin declines, because holders must mark unrealized losses, while gains are not reported until realized. This can create a significant margin between market value and book value.
MSTR Bitcoin Value (MicroStrategy)
MicroStrategy has over $2.15 billion in long-term debt, but that debt is not terribly unruly. The first $650 million comes due in December of 2025, and the company pays a mere 0.75% on it. Also, it is convertible to shares at a price of $398 per share. Given that shares are already trading in over the conversion price, it is highly likely that all of MSTR’s $650 million in 2025 debt will convert, and this fact appears already priced into the equity.
MicroStrategy’s debt schedule (MicroStrategy)
After that, the company has a substantial tranche of $1.05 billion in senior convertible notes that come due in February of 2027. Those notes are rather interesting in that they are zero coupon converts. In February of 2021, MicroStrategy issued the six-year notes that would convert at a price of $1,432 per share, or a 50% premium to the roughly $955 share price at that time.
It is not yet clear how those 2027 notes will be resolved, but the carrying costs are not an issue in the interim. Such deals are likely to be a relic of market folklore over time, including that the company sought to raise $600 million, but raised over $1 billion. In any case, holders of newly acquired shares should be open to the proposition that those note holders end up converting.
Since issuing that debt, Bitcoin and MSTR shares have deflated in value. As that occurred, MSTR also picked up a significant amount of short interest. Over 22% of shares are now held short. Many of these shorts are likely using MSTR as a leveraged method to short Bitcoin, or to hedge a position.
MicroStrategy’s remaining long term debt is $500 million in senior secured notes that pay 6.125% and mature in June of 2028. Those are fairly standard notes at a somewhat reasonable rate. The secured 2028 notes are callable after June of 2024.
MicroStrategy’s core business is actually doing okay too. While it is the case that its revenue growth was only two percent last quarter and six percent year over year for 2021, the company was also transitioning to recurring subscription billing lines of business, as well as product licensing.
MicroStrategy’s subscription and licensing revenue growth (MicroStrategy)
Since the 53,922 Bitcoins MicroStrategy acquired last year had an average purchase price of around $48,710, much of those purchases are still a drag on the balance sheet, and a generator of impairment charges. If Bitcoin’s price does surpass that level again soon, MicroStrategy’s purchases could quickly appear far more clever. Last quarter, the company acquired about 10,349 Bitcoins, at average purchase price of about $57,113 per coin, and those could remain as a blemish for a while longer.
MicroStrategy’s recent underperformance relative to Bitcoin is primarily a function of its leverage to the asset. Bitcoin appears to be reversing its recent downtrend. If Bitcoin is breaking out of its downtrend, which appears to be occurring, MicroStrategy is likely to begin a period of outperformance.
The company is also highly shorted, with about 22% of shares held short, which makes the company a candidate for a short squeeze upon such a breakout. As a result, so long as Bitcoin continues to strengthen, MicroStrategy appears to offer a strong risk/reward setup here.
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Disclosure: I/we have a beneficial long position in the shares of MSTR, BTC-USD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.