Bitcoin rises again. The price of the cryptocurrency recently surpassed $90,000 to a new all-time high. Over the past five years it has increased by almost 1,000%. That should make it MicroStrategy (MSTR 3.96%) and its ex-CEO, Michael Saylor, happy. The software company that turned itself into a Bitcoin investment vehicle is up nearly 400% and is now making more aggressive moves to expand its Bitcoin holdings.
Saylor has said he thinks Bitcoin could reach a price of $13 million by 2045. That may sound laughably optimistic, and investors shouldn’t take that exact price target too seriously, but in retrospect it now looks like Saylor was on to something in 2020 when he started using the cash on MicroStrategy’s balance sheet to buy large amounts of Buy Bitcoin. Now he plans to step on the accelerator further.
Is it too late to get into MicroStrategy stock, or should you consider buying some shares as a way to join the Bitcoin bull run?
Betting big on Bitcoin
MicroStrategy was originally a software company, which it still operates today. However, that segment only generates about $100 million in revenue per quarter, making it insignificant compared to MicroStrategy’s market cap of $67 billion. Most of that value comes from the Bitcoin on the balance sheet.
As of the last update, MicroStrategy owns 279,420 Bitcoins, which are currently worth a total of approximately $25 billion. How did MicroStrategy get the money to acquire all this Bitcoin? A few ways. First, by taking out a lot of debt. It had $4.2 billion in long-term debt on its balance sheet at the end of the third quarter, which it has used to acquire more crypto over the years. Second, the company has initiated ongoing stock offerings to sell new shares of MicroStrategy common stock. The number of MicroStrategy shares outstanding has increased 85% over the past three years.
While these numbers seem significant, MicroStrategy believes it is just getting started with this Bitcoin strategy. In its latest earnings report, the company announced its new ’42’ strategy, which is just a nickname to explain that it plans to take out $21 billion in debt and raise $21 billion through secondary equity issuances , all of which would lead to buying more shares. Bitcoin. At current Bitcoin prices, this would increase his crypto holdings from $25 billion to $67 billion. Bitcoin’s current market cap is $1.74 trillion. A $67 billion position would be almost 4% of all Bitcoin in circulation, making MicroStrategy one of the most aggressive Bitcoin investors in the world.
Differing valuations
The Bitcoin buying strategy has worked so far, but it seems MicroStrategy’s market cap has gotten way ahead of itself. If we include debt, MicroStrategy’s net asset value (NAV) is approximately $21 billion. Yet its market capitalization stands at $67 billion – more than three times its intrinsic value. Remember that MicroStrategy’s operating activities are largely irrelevant to calculating its value. A bet on MicroStrategy is a bet on his ability to purchase Bitcoin and the price appreciation of his current Bitcoin holdings. Today, the market places a huge premium on these assets, compared to if you had just purchased your own Bitcoin on an exchange Coin base.
MSTR Stocks Outstanding Data from YCharts.
Should you buy the shares?
MicroStrategy shares have done phenomenally well in recent years. It may continue to rise if the price of Bitcoin crosses the $100,000 mark. However, this does not mean that MicroStrategy is a good investment. Instead of investing in Bitcoin through a stock that trades at an inflated level of three times its intrinsic value (which is what you would do if you were buying MicroStrategy), you are instead taking direct exposure to the cryptocurrency. Owning Bitcoin directly means your returns have a one-to-one correlation with the crypto. A bet on MicroStrategy is now a bet on Saylor managing these Bitcoin assets for you while diluting shareholders and taking on mountains of debt. That proposal is much riskier.
Of course, you don’t have to bet on cryptocurrencies. No one is forcing you to buy them just because prices went up this fall. But if you want exposure to Bitcoin, there’s no point in getting it through MicroStrategy stock. Buy the cryptocurrency directly.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Bitcoin and Coinbase Global. The Motley Fool has a disclosure policy.
