Summary MicroStrategy's stock has surged over 567% YTD, driven by its unique business model and substantial Bitcoin holdings. The firm leverages Bitcoin's illiquidity premium and low-interest convertible notes to maximize returns, akin to an investment bank's strategy. Trump's pro-crypto stance and regulatory changes could further boost Bitcoin, benefiting MicroStrategy's stock price. Given its high overbought levels, I rate MSTR as a "Hold" due to its potential growth if Bitcoin breaks through and stabilizes above $100,000 apiece. In addition to a number of important market events, the past week has seen the emergence of a new leader in short-term returns. Among both market giants and meme stocks, MicroStrategy Incorporated ( MSTR ) is now the undisputed leader, with a year-to-date gain of more than 567% and a market cap now exceeding $94 billion. Bloomberg chart, shared by @EricBalchunas on X Almost everyone who tried to short MSTR has been massively hurt in recent days - this stock has been the leader in the number of covered positions, inevitably driving quotes to new highs: GS trading desk [proprietary source, 11/19/2024] Those who shorted MSTR most likely had the vision that the company's market cap was just a combination of the value of Bitcoin and a premium on that total value fueled by speculators. Let me remind you that MicroStrategy has 331,200 Bitcoins on its balance sheet, which equates to a valuation of $32.44 billion (today's conversion rate). Logically, then, everything looks like we could add an insignificant fair value of MSTR itself to that amount and get a huge premium to NAV, justifying a logical short. But I believe MSTR stock is growing not only because its movement is driven by speculators and people with a pronounced FOMO. The firm has a specific business model that can generally justify the "premium" if we look at MSTR like the crypto bulls. While operating outside of the banking industry (MSTR is an "AI-driven enterprise analytics software and services company" first of all), MicroStrategy's business model makes sense when viewed in terms of financial concepts such as Net Interest Margin (aka NIM) and illiquidity premium. NIM generally computes the profit margins of a bank's lending by dividing the interest income generated from loans by the interest earned on deposits. In the MicroStrategy instance, it is used metaphorically for its approach to Bitcoin investing. However, rather than make money from loans, MicroStrategy seeks to earn revenue from its Bitcoin investments through minting , putting its bet on Bitcoin's eventual price appreciation. This is like a bank trying to reduce the cost of capital as much as possible while keeping the returns from investments. Yahoo Finance The illiquidity premium is another cornerstone of MicroStrategy's strategy. This premium is simply the extra reward investors want in holding an asset that can’t be readily traded or converted to cash without a steep price discount. Although Bitcoin is one of the most liquid coins on the crypto market, it is also a volatile and speculative coin. Through large stakes in Bitcoin, MicroStrategy is actually attempting to take advantage of this illiquidity premium, and hope that the price of Bitcoin will appreciate over time, leading to greater returns than other more liquid, conventional assets. So MicroStrategy strategically deploys its capital to maximize the potential returns, mobilizing funds efficiently by issuing convertible notes at low interest rates for Bitcoin. On November 21, 2024 , the firm sold $3 billion of unsecured convertible senior notes with no coupon at a 55% conversion premium - this is extremely cheap funding against the backdrop of still high Fed rates (basically at any Fed's rate that's just free $3 billion in funds). In this way, the firm can monetize the long-term appreciation of Bitcoin by enjoying the illiquidity premium. MSTR's press release The strategy allows MicroStrategy to leverage Bitcoin at low-interest rates, securitizing its Bitcoin holdings in the same way that investment banks securitize their client commitments. In doing so, MicroStrategy is the investment bank for Bitcoin , directing capital markets into Bitcoin, and in return purchasing a stake in Bitcoin. This business model isn't necessarily a good thing for investors all the time, since it depends on the appreciation of Bitcoin - a big drop in Bitcoin's value, I suppose, will severely hurt the company. However, looking at the latest events around the crypto industry, I have doubts that the rally in Bitcoin is over. Everyone has already discussed Trump's rise to power in the United States and the implications for Bitcoin. First, Trump has proposed creating a national stockpile of Bitcoin, which he believes could help manage the U.S. debt and strengthen the economy. Secondly, he plans to create a regulatory environment that supports the growth of the crypto industry. This includes appointing crypto advocates to regulatory agencies and replacing the current SEC leadership to create "clearer and more supportive crypto regulations." The head of the SEC is already planning to resign, so it appears that this process has already begun. Third, Trump has expressed a desire to expand Bitcoin mining in the US and advocate for increased domestic production. This will require the introduction of tax incentives to attract crypto businesses and investments, which will most likely be implemented in one form or another by the new administration. The regulatory environment in the United States - the world's leading economy - is therefore being created just in time for corporate interest in Bitcoin as a means of payment and accumulation to continue to grow higher and higher. Considering that Bitcoin has limited issuance capacity, I suspect that its price is likely to remain consistently high. I think that the probability that crypto assets will be perceived by the absolute majority of market participants as a new asset class is very, very high after Trump's win. Today, the market cap of the entire crypto market is ~$3.50 trillion, according to Forbes . This seems like a fairly large value, but compared to the capitalization of gold at $18.25 trillion , this is mere pennies, and compared to the stock market ( $109 trillion ), even more so. That said, the crypto industry definitely has room for growth relative to its place in the asset class landscape, so to speak, and Bitcoin, which now occupies ~55% of the entire new asset class, should be the primary beneficiary. If my assumption about the further growth of Bitcoin capitalization is justified against the backdrop of a paradigm shift in attitudes towards cryptocurrencies in general, then the current estimates of MSTR's future revenues will most likely prove to be too pessimistic. Seeking Alpha, MSTR At the same time, however, as you yourself have understood, MSTR is betting all on one horse in this race - if Bitcoin enters a new phase of strong volatility (i.e correction), as it has repeatedly done, then MSTR's leveraged position will play a bad trick on investors. Your Takeaway In my article, I tried not to look at MSTR from the perspective of the general excitement of those who believe in Bitcoin at $1,000,000 apiece; but at the same time, I did not want to use my usual conservative lens and point the finger at MSTR's growing debt, stagnant past growth rates, and extreme levels of P/S ratios over 190x (FY2024) and hundreds of percent premium to NAV. I just wanted to say that viewing MSTR as a Bitcoin wallet trading at a premium to NAV is to basically not understand the company's business model. I think the investment bank analogy is appropriate in this particular case, and that if Bitcoin settles above $100,000-120,000 in the near term, MSTR stock price can continue to grow quite rapidly. At the same time, given Trump's support and the current position of this asset class among the market capitalizations of other global assets, Bitcoin clearly has growth prospects. Given the extreme levels of overboughtness - and that's true when we look at MSTR's technical levels - I rate the stock as a "Hold" today. Good luck with your investments!
