Summary MicroStrategy's stock is seen as a leveraged bet on Bitcoin, funded through free cash flow, debt issuance, and equity offerings, amplifying exposure without direct leverage. Citron Research's short position was enough to send the stock much lower, highlighting how sensitive it is to sentiment shifts at the moment. MicroStrategy's ability to raise funds at favorable terms boosts its book value per share and Bitcoin holdings per share, but it remains highly sensitive to Bitcoin's performance. Despite long-term potential for Bitcoin as governments adopt it, BTC's chart looks overextended at the moment, which can severely hurt MicroStrategy if it falls. The technical chart for MSTR doesn't look great, as it is acting in a similar way to SMCI stock before it started tumbling. The fact that MSTR stock was down while BTC was up, is another red flag. MicroStrategy ( MSTR ) has established itself as a one-of-a-kind company, using its corporate structure and strong investor sentiment to turn into a Bitcoin ( BTC-USD ) investment bank, as a recent Seeking Alpha article called it. MicroStrategy now has 331,200 Bitcoins , turning its stock into a leveraged bet on the cryptocurrency, funding its purchases via a combination of free cash flow, debt issuance, and ATM equity offerings. This has attracted attention because it gives investors the ability to have amplified exposure to BTC without needing to use leverage. Meanwhile, this works for the company because it's able to raise debt at 0% or near 0% and issue shares at a high valuation to buy BTC. Its proprietary Bitcoin Yield metric also highlights the company's focus on increasing its Bitcoin holdings per share to create value. However, the stock fell by over 16% yesterday, November 21, while Bitcoin was actually up about 4-5%. This created a large bearish engulfing candle, similar to the one seen from Super Micro Computer ( SMCI ) shortly before it imploded. The main reason for the drop was the news that Citron Research, a well-known short-seller, has shorted MSTR. While many people would call this a "nothing burger" because not everyone cares about what Citron Research does, it's telling that the stock still fell by that much on news that has nothing to do with the fundamentals. It goes to show how sensitive investor sentiment can be once it gets stretched so high. Adding to the complexity, Semler Scientific ( SMLR ), a company that has a somewhat similar strategy to MSTR, gained 12.1% yesterday while all of this happened, showing that this is specifically a MSTR stock problem. Additionally, Bitcoin's rally is starting to get overextended in the short term, which can hurt MSTR's valuation. While MicroStrategy remains an intriguing play for the long term (if you're bullish on Bitcoin), it may be prudent to exercise caution in the short term. The stock trades at a speculative premium, is reliant on favorable market conditions, and is highly sensitive to sentiment shifts. Therefore, I rate the stock as a Hold. The Advantage MicroStrategy Has And How It Can Increase Its BVPS And Bitcoin Per Share One of MicroStrategy's most unique advantages is its ability to raise money through both equity and debt offerings at insanely great terms, which can allow the company to quickly increase its book value per share [BVPS] and Bitcoin holdings per share, as long as BTC doesn't tumble, of course. For example, the company recently raised $3 billion worth of convertible bonds with a 0% coupon and a conversion premium of 55%. Bondholders will be able to convert the bonds at a strike price of $672.40. This means that if they're converted into shares, MSTR won't have to pay the $3 billion in cash. This can increase its book value per share, but it depends on whether the conversion price is higher than the company's book value per share at the time of conversion (quite likely). If the conversion price of $672 is higher than the BVPS, the company will see a boost in BVPS because it will be issuing shares at a premium to its intrinsic value, increasing the company’s book value on a per-share basis. If the conversion price is below BVPS, the increase in shares outstanding has the opposite effect. But if MSTR's BVPS was over $672 at that point, then you'd probably be up significantly on the stock and wouldn't care about the dilution. In the meantime, MSTR has debt that it doesn't even have to pay interest on, which is obviously a great deal. The company's has an advantage in equity offerings as well. MicroStrategy has been able to issue shares at prices far above its book value per share in the past, which immediately increases BVPS because it adds more value to the balance sheet than the dilution caused. Just recently, it raised $2.03 billion by issuing shares. In addition to potential BVPS growth, MicroStrategy closely monitors its Bitcoin yield, a proprietary key performance indicator that reflects its ability to grow its Bitcoin holdings on a per-share basis. Per MSTR , Bitcoin Yield measures the "percentage change period-to-period of the ratio between the Company’s bitcoin holdings and its Assumed Diluted Shares Outstanding." This metric helps the company and investors see whether Bitcoin purchases are accretive to shareholders. For example, when MicroStrategy raises money to buy Bitcoin, the company increases its total Bitcoin holdings. If its BTC holdings growth exceeds the growth in Assumed Diluted Shares Outstanding, then the Bitcoin Yield is positive, giving investors more BTC per share. Risks: MSTR Is Rising On Perception And Potential Rather Than Current BTC Holdings While MicroStrategy’s strategy has captivated investors with its ability to raise cheap capital, it seems to me that the stock's valuation is very dependent on perception and future potential rather than its current Bitcoin holdings. This creates some risks. Let's outline them. 1. Overvaluation Relative to Bitcoin Holdings First, we have the age-old argument, but it's a valid one. MicroStrategy's market cap was $89.259 billion as of the most recent closing price, far exceeding the value of its Bitcoin holdings, currently worth ~$32.788 billion if you use a BTC price of $99K. This means there's a speculative premium because the market believes the company can continue raising funds and accumulating Bitcoin. However, is this premium sustainable? Maybe not, especially if there's a Bitcoin bear market or if investor sentiment shifts. All it takes is a pullback in Bitcoin prices or a reassessment of the speculative premium, which could cause the stock to fall quickly, regardless of the company's ability to hold or acquire more Bitcoin. 2. Dependence on Favorable Market Conditions MicroStrategy's ability to issue funds cheaply is key to its strategy. These favorable terms are probably only possible in strong bull markets, where investors are thinking about how to make more money rather than thinking about how to control risk. If BTC's momentum stalls or turns negative, the company may no longer be able to raise money at such favorable terms as investors reconsider the risk at hand. This would limit MSTR's ability to continue growing its Bitcoin holdings quickly. 3. The Double-Edged Sword of Leverage Perception While MicroStrategy is often viewed as a leveraged play on Bitcoin, it doesn't carry traditional leverage, as its market cap far exceeds its Bitcoin holdings. SC Capital Group on Seeking Alpha talked about this in one of his recent articles . Traditional leverage, at least in my view, would mean a market cap of, say, $100 billion and Bitcoin holdings worth $200 billion. Instead, MSTR's leverage comes from its ability to amplify BTC exposure through capital raises. This perception of leverage helps it during bull markets, as investors expect it to take advantage of rising BTC prices. At the same time, however, it also amplifies the downside risk during BTC bear markets, as the speculative premium it carries can collapse if sentiment falls, which would expose the disconnect between the market cap and the value of its BTC holdings. 4. Sentiment Is Important Sentiment is key. The 16% drop on November 21, despite a 4-5% rise in Bitcoin, shows just how much sentiment can quickly change. The sell-off was triggered by Citron Research posting on X that he went short, saying the following: How did this one age? Nearly 4 years ago to the date, Citron was the first to tell readers that MicroStrategy was the ultimate way to invest in Bitcoin, setting a $700 target. Fast forward to today: $MSTR has skyrocketed to over $5,000 (adjusted). Kudos to Michael Saylor for his visionary Bitcoin strategy... Now, with Bitcoin investing easier than ever (ETFs, $COIN , $HOOD ), $MSTR’s volume has completely detached from BTC fundamentals. While Citron remains bullish on Bitcoin, we've hedged with a short $MSTR position. Much respect to @saylor , but even he must know $MSTR is overheated" That's all it took for MSTR to give up many of its gains. Now, imagine if BTC pulled back. MSTR's premium valuation seems fragile. 5. Debt Maturity Risk and Liquidity Concerns The recent debt issuance may be "free," with a 0% interest rate, but it still needs to be paid back, along with the rest of the debt it has raised in the past. If we're in a BTC bear market by the time it has to pay back this debt, it may have to sell shares (likely at an unfavorable price) to pay it off, which would dilute shareholders meaningfully. The rebuttal to this is that BTC prices should be higher in a few years. Fine. That's very possible, but just know the risk you're taking there. 6. Bitcoin's Rally May Be Getting Overheated When would you rather invest in Bitcoin? When it's consolidating for many months and investor sentiment is not super hot (as things were just a couple of months ago), or after a large breakout that has been continuing for weeks? Sure, the rally can keep going, but if you're a long-term investor, you know you'd rather get in when the sentiment is not as hot. In addition, the $100K level is a magnet, pulling investors in because they want to see that $100K level hit. BTC is approaching the magnet, but if it can notably pass that level in the short term remains a key question. A dip can come at any time, and MSTR stock will get hurt big. BTCUSD Chart (TradingView) The Chart Reminds Me Of SMCI Stock When It Started To Top MSTR's stock chart also raises red flags. There's a bearish engulfing candle on its daily chart -- a candlestick pattern where a large red candle fully engulfs the previous green candle. This often signals a potential momentum reversal. Engulfing candles happen often and can provide false signals, but context is important. What makes this one notable is a few things. First, look at the size of that red candle. That does look healthy to me. Second, the candle comes after a large melt-up in price. That's key because it shows that this melt-up has fully melted, indicating a large shift in sentiment. Third, look at the high volume on the bottom of the chart. High volume often confirms that this is not just a fake-out move. MSTR Stock Chart (TradingView) Importantly, a similar pattern was observed earlier this year with SMCI stock, which was riding the AI wave. I remember seeing the pattern play out and thinking, this is the end of the melt-up. You can see the candle and volume (the black arrows I drew). Although SMCI stock bounced in the short term after that -- just enough to trap the bulls -- it eventually faced a decline as sentiment faded. SMCI Stock Chart (TradingView) What also gives me pause is the fact that SMLR stock rose 12.1% yesterday. Semler Scientific, while not the exact same as MSTR (and much smaller) is employing a similar BTC strategy, buying Bitcoin and reporting a BTC yield to shareholders. As a result, its stock has been rising recently because of BTC's rally. BTC was up yesterday, and so was SMLR, but MSTR was put off by a post on X. Maybe new investors aren't willing to pay such premium valuations for MSTR. Maybe everyone who already wanted in on MSTR has already gotten in. It seems like a problem specific to MSTR. The Long-Term Case for Bitcoin Despite the risks tied to MicroStrategy's BTC strategy, BTC itself has solid upside potential for the long term. As most people know, it has a fixed supply, is seeing growing adoption by institutions, and is often used as a hedge against inflation. However, something that can give it solid long-term upside is the growing interest from governments and policymakers, so that's what I'll be discussing below. Government Interest Is Growing Recent political developments suggest that governments are increasingly becoming interested in Bitcoin. People are speculating that there will soon be policies creating Strategic Bitcoin Reserves at both the state and federal levels. This would add plenty of legitimacy and demand to the market. For instance, the Pennsylvania Bitcoin Strategic Reserve Act proposes allocating up to 10% of certain state-managed funds into BTC. Collectively, these funds have $51 billion in assets under management, meaning that a 10% allocation could translate to $5.1 billion worth of Bitcoin purchases, per Forbes . Also, Senator Cynthia Lummis introduced the BITCOIN Act earlier this year, which is pushing for the creation of a national Strategic Bitcoin Reserve. The reserve would be built by purchasing Bitcoin and by keeping the 69,370 BTC that has already been confiscated by U.S. authorities, instead of selling it. The BITCOIN Act even proposes annual purchases of up to 200,000 BTC over five years, totaling 1,000,000 BTC, which will create large amounts of demand for the cryptocurrency. The Bottom Line On MSTR Stock MSTR stock offers a unique way to gain Bitcoin exposure. By issuing equity at high valuations and raising debt at 0% interest, the company has positioned itself as a "Bitcoin investment bank." However, MSTR's valuation is very reliant on perception, favorable market conditions, and future potential, as it trades at a large premium compared to its current Bitcoin holdings and isn't actually leveraged in a traditional sense. Its valuation premium can fade if sentiment were to fall, and a Bitcoin bear market would likely hurt its ability to raise cheap funds, hurting the fundamentals. The sharp 16% decline after Citron Research's post on X demonstrates how vulnerable the stock is to sentiment shifts. Meanwhile, Bitcoin's long-term upside potential remains strong, driven by growing institutional adoption and emerging government interest, so there is potential there. Nonetheless, Bitcoin's chart looks overextended, which is not a time when I'd want to have BTC exposure, personally. While MSTR is a high-risk, high-reward stock, I think it's best to exercise caution for now. I rate is as a Hold.
