Summary Strategy (MicroStrategy) is an inefficient and risky way to gain exposure to Bitcoin; Bitcoin futures are more efficient for leveraged exposure. MSTR's past favorable bond issuances are unlikely to be replicated at the scale needed to justify its market cap premium. Avoid MSTR and buy Bitcoin directly if bullish; MSTR's structure is reminiscent of risky, leveraged financial products from the 2008 crisis. I made a bearish call against Strategy (MicroStrategy) ( MSTR ) on December 15, 2024, as shown below, since then, the stock has plummeted 40%. Some investors are always tempted to buy a market darling after a pullback, hoping momentum carries it forward again, I continue to reiterate my "Strong Sell" rating for this stock and discuss my reasons in this article. My rating history on MSTR ( Seeking Alpha) 1. Quick recap and update of previous article's bearish reason In my previous piece, I argued that MSTR was an inefficient way to invest in Bitcoin. MSTR claims it is providing levered exposure to Bitcoin but if one wanted leveraged exposure (not that I am suggesting any investor do so), Bitcoin futures would be far more efficient than MSTR. When my previous piece came out, Bitcoin was about $104k/coin and has since declined to $84k/coin, about 20% decline, while MSTR has declined by almost 40%. In fact, if we compare against MSTR's peak of $543/share on November 20, 2024, MSTR has declined by 55% in a little over one month despite Bitcoin prices falling about 10%+ (Bitcoin was $95k on November 20, 2024). Bitcoin prices (stockchart.com) Declining 40-55% in two to three months despite much smaller fluctuations in the underlying asset is mind-boggling and further supports my view that even if an investor were very bullish on Bitcoin, MSTR is a very inefficient and risky way to gain exposure. 2. MSTR is still way overvalued If we take a closer look, MSTR currently holds around 500k Bitcoins , which is worth roughly $42.2 billion at latest market prices of $84.5k/coin. MSTR has roughly $7 billion debt on Dec-24 balance sheet. Let's say Bitcoin is relatively flat for next 5 years, then this debt will have to be paid, leaving MSTR shareholders with $35 billion of net assets. The market cap is currently $66 billion which is of almost double net assets - a premium of around $31 billion (90%). So anyone buying into MSTR needs Bitcoin to double just to breakeven over the long run at the current $255/share (those investors that bought in the $300s/$400s/$500/share would need Bitcoin to go up even more to breakeven). The above assumes MSTR's underlying software business has 0 value (which is quite generous given that it has been oscillating between loss-making and slightly profitable for the past decade. 3. MSTR's past financing accomplishments may not be reflective of future market conditions Historically, MSTR has been able to issue bonds at very low-interest rates and this has been one of MSTR's selling propositions. Indeed, this is why many investors are bullish on the stock. But there's a glitch. A: MSTR is not getting money for free despite low stated interest rates. Below is a summary of MSTR's bond issuances from its Dec-24 SEC filing. While the stated interest rates are low, the initial conversion price (or strike price) by now is below market price. Were these convertible noteholders to convert to equity now (which they cannot yet as they have not reached the earliest conversion date), then it would dilute existing shareholders. To take the example of the 2028 Convertible Notes of $1.01 billion issued in September, were these converted to equity at $183.19/share, this would increase shares outstanding by 5 million (roughly 2% of outstanding shares). So looking at the stated interest rate is only one side of the coin - convertible note holders are not providing this money for free, they are getting something in return. MSTR bond list (MSTR 10-k) B. Now, even if we take a leap of faith and believe that MSTR is somehow profiting from convertible note holders' eagerness to get exposure to Bitcoin. Some commentators have suggested that MSTR is actually in the business of selling volatility . To justify the premium between its market cap and net assets, MSTR would need to issue bonds on a gargantuan scale to capture $31 billion for its existing shareholders. And that would only just make current shareholders whole. Let's do a rough estimate - given 10 year treasury yields are at 4.2%, let's assume a company like MicroStrategy would raise money on the open market for 8% interest a year. A 5 year period is 40% cumulative interest (without compounding). Let's assume MicroStrategy is able to issue these bonds at 0% interest with potential conversion rights at strike prices above market price (i.e. out of the money) and the stock price does not reach the strike price, then basically MicroStrategy got to use the proceeds for free. In order to gain $30 billion of value, MicroStrategy would need to issue $75 billion of bonds at these favorable conditions with these favorable results. So far, MSTR has only issued a billion or two of convertible notes here and there. Maybe there's the odd buyer who finds these interesting additions to their portfolio, and maybe it's really a good deal for MSTR. But can it be replicated up to the scale of $75 billion at these terms? I'm skeptical. When markets are giddy, it always sounds easy, but when the market hits a snag, like recently with market favorites such as Tesla ( TSLA ) seeing their stock prices fall from $490/share to $292/share in 2 months, the bullish animal spirits vanish and there is less demand for 0% convertible notes to invest in a company that goes all-in Bitcoin. Three months ago, that may have sounded exciting to certain investors, but once risk appetite vanishes, it sounds well, a lot less tantalizing. C. MSTR's recent issuance has performed poorly. MSTR's recent issuance in November of $2.6 billion convertible notes with a $ 660+ strike and having its stock price halve to $255, I would surmise that the next lender would not be so generous on its terms with MSTR, and if the next lender charges MSTR "market rates" of either 8% interest or a substantially lower strike price for conversion, then MSTR is unable to transfer value from bondholders to shareholders by selling volatility, then I don't see how MSTR will be able to justify its premium to net assets, much less grow its market cap sustainably. In short, hoping that bondholders will be able to provide unlimited amounts of free money just to give investors in their portfolio "optionality" of bitcoin exposure is not a business model. Even if MSTR cinches a deal or two at $1 billion or $2 billion (and recent deals have been poorly performing), I highly doubt this can be replicated on a $75 billion+ level (which is what the current stock price is implying). 4. Bitcoin sentiment indicates Bitcoin prices may be in for a rough patch My recent piece on an indicator of Bitcoin sentiment suggests that Bitcoin might be in for a rough patch. As discussed in the above paragraph, MSTR requires almost perfect conditions (in terms of financing and Bitcoin price appreciation) to even start justifying its market cap premium to net assets. Were market enthusiasm for Bitcoin to dampen or Bitcoin prices to range sidewards for a couple of months, MSTR's stock price could drop dramatically as it may become priced closer to net asset value rather than expectations of raising huge amounts at near nil interest rates and ploughing it into soaring Bitcoin prices. Since my previous piece, Bitcoin prices have slumped as they have often done when sentiment is jiggy. 5. Sum of the above MSTR is trading at a substantial premium to net asset value and would need either (i) massive Bitcoin price gains or (ii) massive value transfer from issuing bonds at favorable terms to justify. If either does not materialize, then even if Bitcoin prices remain at current levels (and that itself is a big if, given Bitcoin's volatile historical record), MSTR has substantial downside risk. Risks to bearish thesis Now it could be possible (though I would argue very improbable) that MSTR issues massive amounts of bonds at favorable conditions. Who knows, there could be the off-chance that the Fed massively lowers interest rates and MSTR is able to raise hundreds of billions of dollars at minimal interest to plough into Bitcoin and keep the gravy train going for its shareholders. Conclusion: Avoid MSTR and buy Bitcoin directly if an investor is bullishly inclined. Ironically Michael Saylor compared Bitcoin to Manhattan real estate , and even if this is true, MSTR rather reminds me of the CDO squared subprime debt in the 2008 financial crisis. While the underlying asset (house prices in America) eventually came back and hit record highs, the CDO squared holders were wiped out in the liquidity crunch. CDOs are the cautionary tale of leverage and opacity: Too much leverage packed into an opaque structure assuming too many things need to operate perfectly may not survive a downturn even if the underlying asset eventually recovers and does well.
