Summary MicroStrategy is the top-performing and most traded stock, driven by Bitcoin enthusiasm as it nears $100,000, but increasing Bitcoin purchases heightens risk. Michael Saylor's strategy involves leveraging Bitcoin volatility, with significant gains from ATM and convertible bond offerings, projecting substantial long-term per-share value. Saylor's $13 million Bitcoin target by 2045 hinges on decreasing volatility and high annual returns, but historical bear markets pose significant risks. MSTR's rising average Bitcoin purchase price and potential 2025 liquidity issues could lead to financial strain, share dilution, and investor uncertainty. Thesis Summary MicroStrategy ( MSTR ) is now the best-performing stock for the year and also the most traded. Enthusiasm for Bitcoin and MSTR is reaching a fever pitch as the world's premier cryptocurrency approaches $100,000. Michael Saylor, true to his word, just keeps on buying, but with every new purchase, the stock becomes more risky as MSTR's average price increases. Saylor has lofty price targets for Bitcoin, citing as high as $13 million per coin. In the very long run, maybe, but before that happens, Bitcoin will undergo its typical cycles. In my last MSTR article, I discussed the company's worst-case scenario, concluding bankruptcy was unlikely. However, as MSTR buys more Bitcoin at higher prices, it becomes more likely that MSTR's BTC position will be underwater in the next bear market. This could come as early as 2025 if we pay attention to liquidity dynamics, which is why I am downgrading MSTR to a sell. The MSTR Secret Sauce MicroStrategy ((MSTR)) has been on an ascent, taking the stock to pass the levels of the .com mania. MSTR Price (TV) A come-back story if there ever was one. In a recent interview, MSTR went into detail on how the company is creating value by "selling volatility and recycling it back into Bitcoin." He even concluded that the company had generated around $500 million per day, making it potentially the "most profitable company in the United States," A couple of recent examples of how MSTR is doing this: At-The-Market Offering (ATM): The company executed a $4.6 billion ATM offering at a 70% Bitcoin spread, resulting in $3 billion in Bitcoin gains over five days. Saylor projected this would translate into $1,225 per share over 10 years. Convertible Bond Offering: MicroStrategy raised $3 billion at an 80% Bitcoin spread, producing $2.4 billion in Bitcoin gains. This was estimated to generate $125 per share over a decade. Source: Cryptoglobe.com We're not going to argue the merits of MSTR's strategy here, though I'm sure it will take up most of the comments section. I'm here to crunch some of my numbers. Crunching Some Numbers Michael Saylor's Bitcoin strategy makes perfect sense if you have the conviction that Bitcoin could reach $13 million per coin. My forecast is $13 million a coin by the year 2045, and what I tell everybody is every bitcoin you don't buy today is going to cost you $13 million in the future. Source. Saylor interview, Yahoo Finance Saylor seems to get to this valuation by applying some sort of Annual Return estimates. My long-term forecast is 21 years, 29% ARR. Right now we're 60% ARR, it will decelerate toward 20% ARR over the next 21 years, and the volatility will decelerate, Source. Saylor interview, Yahoo Finance Through this process, Saylor also expects volatility will decrease significantly. He better hope it does, or MSTR could be in big trouble. BTC LT Price chart (TV) The average Bitcoin bear market sees drawdowns of around 75%. Okay, maybe in the next 5-10 years Bitcoin will become a lot more stable, but a bear market could start according to halving cycle theory in 2025. If Saylor wants to use historical performance as a point of reference, then surely this is a valid point too. On the Hook For $4 Billion In my last article, we also crunched some numbers on MSTR, but a lot has changed since then. MSTR, true to its ethos, keeps buying Bitcoin, but this has drastically increased its average purchase price, which is now just below $50,000. As of right now, if an "average" bear market takes hold, then Bitcoin's price could easily dip below MSTR's average purchase price. More likely, a bear market could set in late 2025. The price of BTC will likely be higher by then, but then, of course, so will MSTR's average purchase price. When that time comes, will the company be able to afford a 75% or even a mere 50% drawdown in Bitcoin? From a literal perspective, likely not. MSTR convertible debt (10Q) MSTR has financed a lot of its Bitcoin purchases through convertible notes, which is all fine as long as the share price remains above the conversion price. We have issues dating into 2031, with convertible prices around the $200 level. This is stay way in the future, but consider that merely a month ago MSTR was trading below $200. The problem here is that if MSTR actually has to pay back the convertible, it will need to put together around $4 billion. It currently holds $46.3 million of cash and cash equivalents. Therefore, as mentioned above, Saylor can't afford a bear market. Eventually, MSTR would be forced to find financing, which could prove hard, or issue more equity. As I concluded in my last article, I don't think MSTR is at risk of bankruptcy or anything, but shareholders could be in for a wild ride. 2025 Liquidity Headwinds To close this out, let's talk about Bitcoin and liquidity. It's no secret that Bitcoin has become a liquidity proxy. Bitcoin price (Refinitiv) In the long run, I agree with Saylor. Bitcoin is a great way to hedge against higher liquidity, which I expect will continue to trend up. However, liquidity is also cyclical, and 2025 could be a year where liquidity conditions tighten, as both the economy and the Federal government will have to undergo significant re-financing. From the corporate side, we have a lot of the debt acquired during COVID which will be coming due in 2025-26. Debt maturity wall (Bloomberg) This debt was taken on at historically low rates, but this time, corporations won't be so lucky. And the same can be applied to the Federal deficit. Interest payments on federal debt (CBO) Interest as a % of payments could skyrocket as the government has to refinance at higher rates. Both of these events will serve to drain liquidity, and unless the Federal Reserve steps in, this could put a dampener on markets, and more notably, Bitcoin. Final Thoughts I don't disagree with Saylor that Bitcoin is a great asset to hold, long-term, but that doesn't mean that MSTR can just keep appreciating from here. The way I see it, as MSTR's average purchase price increases, so does the risk that Bitcoin falls below this price, which increases the risk that investors sell, and then increases the risk that the convertibles will have to be paid out in cash, leading to share dilution.
