Summary MicroStrategy may be overvalued at $350/share, with a NAV of $107/share. MSTR's C Corp structure results in double taxation, which is a less favorable tax structure than ETFs such as IBIT. While MSTR has some debt, each dollar of MSTR market cap is currently only backed up by $0.30 of bitcoin, potentially resulting in less bitcoin leverage than investors expect. MSTR Short Thesis MicroStrategy ( MSTR ) is a C corporation that owns 280,000 bitcoins or $100/share, net of debt, and has a software business that is worth ~$7/share, for a total NAV of $107/share. Shares are trading today at $355/share and may have significant downside, regardless of the direction of Bitcoin. There are a few misconceptions that investors do not understand about MSTR that have led to extreme overvaluation, which I will share in this write-up. First, MSTR is a C Corporation, which is subject to double taxation on the sale of any Bitcoin gains. MSTR is subject to double taxation because shareholders who buy MSTR pay short-term or long-term gains on their trading gains in the shares. In addition, the company pays taxes on any gains in bitcoin realized at the corporate level. The company has been a long-term holder of bitcoin, and I expect that to continue; however, eventual tax considerations are important upon making an initial investment. Especially in a scenario where bitcoin really works well, like let's say to $1m, the company would pay capital gains if/when that is ever realized. Contrasting that to an ETF or investment vehicle that does not pay tax at the entity level is a meaningful disadvantage for MSTR versus an ETF like IBIT. There is no way to distribute the bitcoins or monetize the bitcoins without incurring significant tax liability. Because of this structural tax disadvantage, I think that MSTR eventually may trade in-line or even at a discount to NAV, given the superior legal and tax structure of ETFs. Second, MSTR uses what management calls "intelligent leverage". However, at this valuation, one dollar of MSTR market cap is only backed by $0.30 of bitcoin, and thus it is not a "leveraged" investment to bitcoin. Giving management credit, shares have significantly outperformed bitcoin because its premium to NAV increased from 1x to 3x over the last two years. However, on a go forward basis with only 30% exposure to bitcoin, MSTR might not keep up with bitcoin's performance in the future. I think that IBIT is a better option for investors seeking bitcoin exposure through a listed stock because of its long-term superior structure being an ETF which is not subject to double taxation and IBIT having 100% underlying exposure to bitcoin versus MSTR's 30% exposure. Further, MSTR pays a 2% fee for ATM equity issuance, which is a significant cost versus IBIT paying nothing for newly created ETF shares. While a small part of the story, I estimate the software business is worth $7/share. I estimate the software business is worth 3x TTM sales of $480m divided by 210m shares for a total $7/share. Sales are declining, and the business does not generate free cash flow. The business operates in the highly competitive field of business intelligence. I think this valuation is probably on the high side of what it would sell for in a private market transaction. Case study in February 2021. On February 9th, 2021, MSTR closed at $127/share, compared to its NAV $40/share, approximately 3.2x NAV (today's price/NAV is also 3.2x price/NAV). Bitcoin closed that day at $47,336. Bitcoin continued on to reach a closing high of $63,410 on 4/15/21, up +34% while MSTR closed at $74/share, -42% over that two-month period. Underperforming bitcoin by 76% in just two months from the same 3.2x price/NAV starting point that we are at today. And more importantly, declining significantly while the bitcoin price continued to rise. Given the significant premium and disadvantaged tax structure of being a C Corp, investors in MSTR should be aware that MSTR could decline even if bitcoin prices rise. In summary, I estimate that MSTR may be worth around 1x NAV or $107/share, given the disadvantageous tax structure of being a C Corp, which results in double taxation. Given each dollar of MSTR only has $0.30 of bitcoin behind it, I think there is a risk that MSTR underperforms bitcoin. Investors seeking bitcoin exposure may be better off buying a low-cost bitcoin ETF such as IBIT. Catalysts: MSTR's use of the ATM program increases the float and could eventually put pressure on the NAV premium. As investors better understand the tax consequences of MSTR being a C Corporation, some investors might switch their bitcoin exposure from MSTR to IBIT could reduce the premium to NAV that MSTR currently trades at. Risks: Bitcoin's price could increase significantly. MSTR's premium to NAV could increase.
