MicroStrategy Could Be A Multi-Trillion Dollar Company

Summary MicroStrategy is effectively Bitcoin's only investment bank. MSTR's unique strategy involves issuing securities backed by BTC, creating significant value through a spread between BTC's CAGR and fiat cost of capital. Its BTC purchases are best thought of as revenue, and its rock bottom costs of capital are best thought of as costs of revenue. MSTR's market cap could potentially reach $690 billion to $3 trillion, driven by its unparalleled role in the BTC ecosystem and virtually impregnable moat of owning 1.3% of all BTC. Frankly, I got MicroStrategy ( MSTR ) wrong. I've been heavily long and consistently bullish on MSTR in my Seeking Alpha articles , but I didn't fully grasp the enormity of what they were doing. There haven't been many bullish voices for MSTR. Most people focus on the market cap's premium over the company's BTC holdings and scream "overvalued" and "strong sell." This was the mistake of Kerrisdale Capital , which would be seriously underwater on their trade if they had kept it open. Last time, I warned against long BTC, short MSTR pair trades. In the past, I have focused on the fact that BTC per share was growing, which justifies a premium. After all, most stocks trade at over 1X their book value because they are expected to grow their book value per share over time. I also focused on MSTR's use of intelligent leverage, where they sold their implied volatility in the form of convertible debt. This allows them to leverage BTC with near 0 interest rates, increase their volatility, and do more convertible issuances at better terms. MSTR's convertible bonds have outperformed BTC and the S&P 500. And its common stock has outperformed every single company in the index, since it started buying BTC in 2021. MSTR Has Outperformed Every Stock In the SPX (MSTR) MSTR Convertibles Have Outperformed (MSTR) For a long time, this was my perspective of MSTR. It was far more correct than those who said MSTR was a leveraged BTC fund which must trade at the NAV. But it was far off from what MSTR actually is, which is what I'm writing this article about. To set the stage: MSTR is a "meta" bet on BTC. By this, I mean it is more of a pure play on BTC than BTC itself. This was shocking to me because I thought nothing could be more of a financial bet on an asset than owning the asset itself. Now for the practical revelation: MSTR is the only Bitcoin investment bank and will, in the future, be the most well-capitalized Bitcoin investment bank ever. Let's see why. Bitcoin's Only Investment Bank MicroStrategy is like Bitcoin's investment bank because all MicroStrategy securities (convertible bonds and common stock for now, but the issuance of other securities is also on the table) are backed ultimately by BTC. Technically, there is also MicroStrategy's software business, but for simplicity we can omit this from the conversation. Note that I'm using "MicroStrategy" and not "MSTR" on purpose to distinguish the company from the common stock security—I will do this throughout the article and only use "MSTR" when specifically talking about the common stock. MicroStrategy is an operation that buys BTC by raising money from capital markets. But another way to understand this flow of cash is to think of Bitcoin itself as the only client of MicroStrategy, the investment bank. A traditional investment bank securitizes the commitments of their client. It gives these securities to the capital markets in return for cash. It then passes the cash off to its client and takes a cut for the work. The client uses the cash to increase its value via business operations and pay off commitments: dividends and interest for equity and debt, respectively. Investment banking is a central component of any advanced, modern economy because it helps link savers and borrowers, enabling the intertemporal exchange of money. This is the function of all capital markets. This is basically what MicroStrategy does. MicroStrategy securitizes BTC by issuing MicroStrategy securities. These are like Bitcoin securities because it's all backed by the BTC held by MicroStrategy. MicroStrategy then sells the securities to the capital markets and gives all the cash to its client, Bitcoin. Now, the only main difference is that rather than taking a cut in cash, MicroStrategy's cut is owning BTC. This would be like a traditional investment bank taking a cut by keeping some of the equity or debt of its client. Remember this point. A good investment bank is able to square the needs of its client and the capital markets. Imagine if the markets really wanted bonds and a client wanted to raise money. A good investment bank provides the research and consulting services which informs the client, "Hey! Don't do an equity raise, these people love debt right now, and you'd get a better deal." It is a win-win. The market gets what it wants, and the client raises more money at favorable terms. This is also what MicroStrategy does for Bitcoin. I've listened to the last three MicroStrategy earnings calls live (because MSTR is a huge chunk of my portfolio) and they always mention that they are looking for "favorable" terms from the market. If the appetite for convertibles is good, then they issue convertibles. An example of this was the week before 20 September , where they got $1.01 billion from convertibles. If the appetite for MSTR shares is strong, then they do at-the-market (ATM) offerings. An example of this was the week before 11 November , where they got $2.03 billion from ATM offerings. MicroStrategy is that good investment bank which maximizes the money raised for its client, Bitcoin. Another thing a good investment bank does for clients is help market the clients' security offerings. Traditionally, this looks like publishing sell-side research reports which explain the investment merits. The most important result is that the price of the client's stock goes up because the buy-side becomes aware of the facts, and they start taking positions. This is also precisely what MicroStrategy does for Bitcoin. MicroStrategy considers itself the world's first " Bitcoin Development Company ." The Executive Chairman, Michael Saylor, has spent hundreds of hours on podcasts talking about Bitcoin. MicroStrategy hosts events like Bitcoin For Corporations, in which they are open-source their playbook for generating excess returns via a Bitcoin treasury strategy. Like the role of traditional investment banks, all of this action serves to increase the knowledge and awareness of BTC among the global investing and finance community. There are many more examples of how MicroStrategy behaves like an investment bank with Bitcoin as its only client. But I'll mention only one more because this one is particularly important, and it is also a distinction from traditional investment banks. MicroStrategy's BTC purchases are effectively cornering the BTC market by removing supply from the market. Saylor has been adamant that he will never sell the BTC. The force of raising billions of dollars and piling everything into BTC is a major factor which has and will continue to increase BTC's price. The other force is BTC's absolute scarcity—when supply is removed from the market, there will never be more supply to replace it. MSTR's meteoric rise is itself an ongoing marketing campaign for a Bitcoin acquisition strategy. I think every single CFO, public or private, must contend with the fact that they might be giving their shareholders suboptimal stock performance by ignoring BTC. Every single informed investor, I believe, must contend with the fact that if they don't own something that is acquiring BTC, they are possibly depriving themselves to suboptimal performance (and thus far those equities without BTC have demonstrably underperformed—this is just the objective fact). But the result of more companies doing this is that the cornering of the BTC market will become much stronger. MicroStrategy is one public company. If 10 public companies start doing this, there is going to be much more demand pressure on BTC. How Does This Impact MSTR Value? MSTR is the equity position in this investment bank. Value accrues to equity holders of financial institutions from a spread. Banks lend at one rate and borrow at another. Investment banks sell securities at one price and take a cut, which means they effectively "bought" the securities at a lower price. MSTR's spread is between the fiat cost of capital and BTC's fiat CAGR. BTC's CAGR is well over 50% on most multi-year windows. The fiat cost of capital with convertible bonds is extremely low. Bonds are a bit higher. The equity cost of capital is even higher—think S&P 500 with a higher beta. But none of this is remotely close to BTC's CAGR. Thus, there is a substantial spread which accrues to shareholders. I think this is how one should see MSTR. When you take on this perspective, the premium over the BTC holdings becomes a much more remote aspect of the valuation picture. People are tunnel visioned on the premium, but they really shouldn't be. Here's where the premium is important. Remember how I said that the core divergence from traditional investment banks is that MicroStrategy holds the BTC, which is like a traditional investment bank holding onto a bunch of shares from the deal they do with their clients? A normal investment bank would get the cash and distribute it to shareholders in a dividend or buyback. MSTR takes the cash and distributes it to shareholders in the form of a higher BTC per assumed diluted share. They call this BTC Yield. Now it should all come together. You don't have to think of the premium as a function of BTC Yield. This was my mistake before: I thought that the premium was justified because BTC Yield was positive. You do have to think of the premium as the investment bank business, which captures a gigantic spread between BTC's fiat CAGR and the fiat cost of capital that the investment bank is accessing for its only client. Put differently, MSTR is best regarded as three components, not two. The classical, and mistaken, two components are: BTC holdings and software business. The actual three components are: BTC holdings, software business, Bitcoin's investment bank. And "Bitcoin's investment bank" is a tremendous profit machine (as long as BTC maintains its CAGR). It just never crosses the income statement as actual earnings, and that has confused everyone. It has a huge amount of "accrued revenue" because over the long run this value accrues to the equity in the form of unrealized capital gains on BTC. MicroStrategy is misunderstood because it is straddling two different monetary standards. Fiat accounting forces the treatment of BTC as a balance sheet item. The economic reality is that the BTC purchased is actually a revenue to MSTR, just as the revenue for a bank is the interest received on loans. Here's another way to see the reality. What I am calling the "Bitcoin's investment bank" business segment must have costs which are reflected in the financials of the business. There are already revenues: I am arguing that revenues are the BTC that MicroStrategy purchases. The costs are interest payments on convertible debt and dilutions on the equity as a result of convertibles and ATM offerings. To tie it back to the bank example: BTC is revenue to MSTR, while interest expenses and dilution are the costs. Interest on loans is revenue to a bank while interest paid to depositors are the costs. Addressing One Rebuttal Now, you might be thinking: "But an actual investment bank has to give the money it raises to its client. You can't just treat the money MicroStrategy raises as revenues which flow to MSTR! If you claim Bitcoin is the client, then Bitcoin needs to be taking that money to do something with it to make BTC more successful! And if Bitcoin is taking that money, then how can you say that it is a revenue to MSTR, which is a separate entity?" If this is your rebuke, then it means you deeply understand the financial sector. If you didn't think about this, you are likely in good company. The critique is saying that there are some awkward situations when you take the "Bitcoin as a client" observation to its logical conclusion because Bitcoin is an inanimate thing, and it isn't a group of people working towards the human endeavor of value creation. Here's why I think we can look past this rebuke, and effectively sidestep it. Again, MicroStrategy's underwriting fee is a stake in the client. It is not dollars. An underwriting fee is revenue investment banks receive from clients. When MicroStrategy buys BTC, it is literally giving the money to Bitcoin. Bitcoin immediately takes that money and "creates" value because the capital injection increases the market cap of the absolutely scarce BTC, all else equal. Bitcoin then gives the BTC—the underwriting fee—back to MicroStrategy. The dollars MicroStrategy raised go to Bitcoin, and then higher-valued BTC (due to the capital injection) immediately comes back to MicroStrategy. The money indeed went to the client and went back to MicroStrategy as revenue, just in the form of BTC. This happened at the same moment in time. And what do I mean by "Bitcoin" as an entity? It really is the collective of everything and everyone involved with Bitcoin. If you hold BTC, run a node, are a miner, use BTC for payments, you are part of Bitcoin. It is the network. Networks have value because people use them. So when "Bitcoin" gives MicroStrategy some BTC as a revenue, what's happening is some holder of BTC paid MicroStrategy the investment bank for raising money for the network. The holder got some dollars and MicroStrategy got its BTC. Hence, Bitcoin got the money and paid the revenue right back. What Else Can The Investment Bank Do? Once you internalize that MicroStrategy is Bitcoin's investment bank, you should see that MSTR can chop up the risk profile of its issued BTC securities by designing the covenants in creative ways. So far, they've only dealt with common stock issuance, a bit of secured debt, and convertibles. But they can also issue preferred shares, mezz debt, warrants, and structured products. These can all be adjusted to whatever risk and return profile the market wants. The only rule is that the cost of capital (which means the commitments within these securities) is lower than the expected CAGR of BTC. Everything else is absorbed by MSTR common stock And this is an extremely profound feature. Many investors desire lower volatility, lower returns. Any volatility or returns from BTC which is in excess of what these investors desire accrues to the common stock. This is how MSTR has 120 IV and meteoric growth. MSTR is the volatility and return dampener for the securities issuances of MicroStrategy. Think of conservation of energy and mass as a metaphor for what is happening. BTC's returns and volatility comes into the system, but many investors don't want something that volatile, even if the returns are great. So MSTR takes in the BTC and absorbs a chunk of the returns and a chunk of the volatility into itself, while giving these other investors the precise return and risk profile they desire. Total volatility and returns across the system remains the same: it all comes from BTC, and there is a conservation of volatility and returns within the system. The financial engineering of MSTR comes from chopping up and distributing the desired quantity of returns and volatility to each class of investor. As I've covered many times before, this creates immense volatility in MSTR, which allows MicroStrategy to issue convertible debt at near 0% interest rates because they are effectively selling the volatility and monetizing the second moment of the distribution . But MicroStrategy getting more BTC translates to the investment bank segment absorbing more BTC to chop up into risk and return profiles. As Saylor says in the Q3 earnings call : We think ultimately it's going to be good for investors. It's going to be good for our common stock shareholders. There's really nobody's really losing because as I've said before, it's like bitcoin is giving us 50 vol, 50 ARR. And the world's full of people that would be delighted to take 20 vol, 20 ARR. And if we gave it to them over a long enough timeframe, it looks like—it's like a 60% BTC spread product where $100 million of capital results in $60 million of BTC gains for our shareholders. And it still results in a very compelling instrument that's very easy to understand for a new class of investors. What other risk and return profiles are there? Preferred stock can be structured to give the investor some number of returns via dividends. This gives them some upside and little downside. And generally stable cash flows. There are also convertibles on preferred stock. This would give the investor the option to acquire the above risk and return profile. There are warrants, which are effectively pure long-term call options on MSTR. I have stated in the past that MicroStrategy can issue warrants to buy BTC calls. After all, MSTR has a significantly higher IV than BTC, so this could be a very natural arbitrage. There are different classes of debt with various covenants which might be useful to investors. And of course there are structured products for ISDA-holders. These can literally be designed to fit any risk/ return profile. The point is that convertibles are the tip of the iceberg for all the different securities markets which MicroStrategy the investment bank can do business in. With every issuance, its client, Bitcoin, gets a few more billion dollars in capital, which pushes up the BTC market cap by a lot more than a few billion dollars. Investment Bank Valuation So if the BTC purchases are revenues and the interest rate and dilution are the cost of revenues, then we can redo MSTR's financials to reflect this view of economic reality. You can see the entire history of MicroStrategy BTC purchases on Michael Saylor (MicroStrategy) Portfolio Tracker . I simply took those entries and aggregated them by quarter starting from Q1 of 2021. MSTR BTC Purchases (saylortracker, compiled by Author) This reflects (in order from left to right): the total cost of all BTC purchased in the quarter, the total value of that BTC on 16 November 2024, and the total unrealized capital gain thus far from that purchase. Since the BTC purchased is "revenue" to MSTR the investment bank, the cost of the BTC purchased column will be the quarterly "revenue" in our new model. A combination of MSTR's interest rate on debt and dilution is the cost of that revenue. I assume the cost of capital to be 15%, it's just under 2X the average annual return of the S&P 500, which is the equity cost of capital. I multiply the "revenue" by 0.85 to get the gross profit. Another way to say this is that 15% of the BTC MSTR purchases is actually lost on a per share basis due to a combination of interest expenses and dilution. And the column of P/L is best understood as each quarter's contribution to current accrued revenues. If you add up the entire column, then that is the total unrealized capital gains of MSTR's BTC holdings. This changes with the price of BTC. The restated columns look like this: MSTR Investment Bank Numbers (saylortracker, compiled by Author) So really, the investment bank was responsible for over $5 billion in gross profits this year alone. And it has grown tremendously year after year from 2023 and 2022. All of this is before we look at the accrued revenues. When you add all the accrued revenues together, you get $6.7 billion. I hope MSTR's $69 billion market cap is making more sense now. Even with just the $5 billion gross, we're looking at an adjusted TTM PE ratio of 14 (69 billion / 5 billion = 14). Here are the PE's for the five bulge bracket US investment banks: IB Multiples (Seeking Alpha) Pretty close. In fact, MSTR looks to be on the lower end of this list. You could say that the earnings on these multiples are net and not gross profits, but then I would counter by saying that $6.7 billion in accrued revenues with 100% profit margins (this is what unrealized capital gains are) were not included in my MSTR adjusted PE multiple. I could also counter by saying that I used the entire MSTR market cap (a third of which is unencumbered BTC) to divide by the investment bank earnings, thus using a much bigger numerator and inflating the end multiple. A third possible counter would be that I used a pretty enormous 15% cost of capital assumption. Nearly all of MSTR's debt has been under 1% interest rate. These are napkin math, so I want to make the margin of safety abundantly clear. These are three layers of significant margin of safety. Now we move to forward earnings. MicroStrategy announced a $42 billion capital raise to be carried out over the next 3 years. Nearly all proceeds will go to buying a stake in the client: Bitcoin. That is an average of $14 billion per year. Even if we assumed a 30% cost of capital, the gross profit from this would be $10 billion per year, which is 2X what MSTR did this year. So if the business has 100% growth and a 14 PE, that puts its PEG ratio at 0.14, again with all that margin of safety baked in. The bulge bracket numbers above indicate forward PEG non-GAAP ratios of 5–12X MSTR's 0.14 (I'm dropping C and JPM). This tells me that, conservatively, we have another 5X from the current market cap of $69 billion. Now we have to consider that MSTR has no competition as an investment bank for Bitcoin. It currently is the only one because no one else is issuing securities like MicroStrategy is. Also, MicroStrategy will always be the most well capitalized Bitcoin investment bank because no one else will have 1.3% of the BTC supply. Finally, it is only MSTR which has enough volatility to support such a convertible bonds strategy. If anyone else tried to add BTC to its balance sheet, its equity still wouldn't be as volatile as MSTR. This is effectively a permanent moat. So there probably should be a "monopoly" premium attached to MSTR too. An investor who wants traditional investment bank exposure can pick any of the several investment banks. An investor who wants a Bitcoin investment bank is left with only one option. If you are unconvinced about a monopoly premium, I urge you to take a look at how NVDA is priced relative to other chipmakers. Chips Multiples (Seeking Alpha) Market leaders always get a premium. And chips aren't even close to a monopoly. It would be much more extreme in a real monopoly. I will put this premium at 2–4X a traditional investment bank's multiples (which exist in a much more competitive market). If we apply the monopoly premium of 2X and then apply the PEG ratios, the investment bank's equity value alone is probably worth 10–24X what the current market cap is now, with all three layers of margin of safety still intact. If we remove those margins of safety, this makes MSTR a potentially multi-trillion dollar business. So, my official MSTR market cap target: somewhere between $690 billion and $3 trillion . Lastly, this analysis derives equity value based on the investment bank "earnings". We haven't yet covered the 279,420 BTC on the balance sheet. That is another $25 billion. MSTR also retains the option to deploy the BTC to earn additional income, which should, of course, increase the value of the raw holdings. One final quirk. Notice how the premium to BTC NAV completely disappears as a consideration after you see things this way? Risks And Caveats MSTR would fail if Bitcoin fails. The whole investment thesis is predicated upon accepting Bitcoin risk. But if BTC crashes, I'm not sure that would mean MSTR would crash harder. Positive BTC Yield should be regarded as an alpha on top of BTC performance, and I've argued this in the past too . I think it really comes down to the duration of a BTC drawdown. If the drawdown is extended and MSTR's price is below the conversion price on its convertibles, then convertible bonds investors might choose not to convert. This could force MSTR to issue more debt to pay off these demands, or even to sell BTC. That could be catastrophic for sentiment. I think it is also possible that MSTR could fail if regulators step in to squash the business. Maybe a law can be passed that securities issuances cannot be used to buy BTC, or something to that effect. This would certainly be a remote, tail risk. The incoming Trump administration is definitely more politically aligned with crypto than the outgoing administration. I think it is extremely unlikely for MSTR to get regulated away. One important caveat to the analysis and napkin math I did here is that I'm not saying the share price will 10–24X. I am saying the market cap will. MSTR does a ton of dilutions, so share price growth will always be less than market cap growth. I'm not sure how much dilution will occur, but personally, I think that the upside is too massive to be concerned about this. The last caveat is that most people may not see it this way for a while. I anticipate a lot of pushback against this thesis because it is very unique compared to what is normally said about MSTR, or anything in securities analysis for that matter. The lack of recognition of this economic reality could take a long time to correct. While there is opportunity in that, there are also significant risks. Being early and being wrong is often the same thing in markets. Conclusion I think MSTR is more of a Bitcoin bet than BTC itself. It capitalizes on aspects of Bitcoin that a simple BTC investment cannot do so efficiently. With BTC becoming more mainstream, you will certainly see BTC backed securities, of which MSTR is the core beneficiary. MSTR is monetizing BTC's volatility and its network effect growth. Here are my other MSTR articles .