Summary
Kerrisdale Capital Management released a critical report on MicroStrategy, focusing on the unjustified premium of its stock relative to the underlying bitcoin value it holds. The report emphasizes that the stock's price implies a bitcoin value more than double the current spot price, highlighting market distortions in valuation.
Who is MicroStrategy
MicroStrategy Incorporated, founded in 1989 and led by CEO Michael Saylor, is a business intelligence and software analytics company that has transformed into a bitcoin development company. It uses cash flows from its software operations and various capital markets financing to acquire bitcoin, holding over 214,000 bitcoins mainly purchased using debt and equity offerings, while its core operating business now only accounts for a small fraction of its enterprise value.
Key Points from Report
Unjustified Premium on Bitcoin Exposure
- MicroStrategy shares trade at a 2.6x premium to the spot price of bitcoin, implying a bitcoin price of $177,000 compared to the actual $68,900 spot price.
- The company’s stock premium is historically high, exceeding the 94% of trading days which saw premiums below 2.0x since 2021, with an average premium of 1.3x over three years.
Leverage and Dilution Impact
- MicroStrategy's bitcoin purchases have been funded largely through $726 million cash, $500 million secured debt, $1.7 billion convertible notes, and $3.1 billion in equity offerings.
- Despite increasing bitcoin holdings, dilution from equity and convertible notes keeps bitcoin owned per share virtually unchanged, limiting shareholder value creation beyond bitcoin price appreciation.
Comparative Alternatives and Market Risks
- Availability of low-fee bitcoin ETPs and ETFs such as BlackRock's IBIT and Fidelity's FBTC offer investors exposure to bitcoin at 0.25% fees and with greater liquidity, challenging MicroStrategy's premium.
- The software business contributes marginally to overall value (~3%), and generated only $10 million in free cash flow in 2023, insufficient to significantly augment bitcoin holdings internally.
Activ8 Finance Analysis
The Kerrisdale report highlights concerns over MicroStrategy’s current stock valuation, emphasizing that its premium to the bitcoin net asset value is historically elevated and potentially unsustainable. Given the dilution effects and limited growth in bitcoin per share, alongside emerging, more cost-effective bitcoin investment vehicles, investors should be cautious about the inflated multiples in MicroStrategy shares. This situation suggests a possible correction in the premium, reflecting a realignment to more rational historical valuation levels.