Earlier this morning, I used to be stay in The Oxford Clubroom discussing what I imagine is the worst inventory on this planet.
The inventory is MicroStrategy (Nasdaq: MSTR).
I first criticized MicroStrategy in early 2021. I used to be quoted in The New York Times, Bloomberg, Fox Business and different monetary media about what I believed was “probably the most irresponsible motion [I’d] ever seen from an government crew or board.”
My challenge with MicroStrategy was that regardless of working a software program enterprise, it had shifted its focus to purchasing and holding Bitcoin.
The corporate was borrowing cash to accumulate increasingly more Bitcoin, and CEO Michael Saylor stated he deliberate on by no means promoting any of the beloved cryptocurrency.
No matter what you consider Bitcoin, that’s not a enterprise mannequin. And I used to be outraged that the board of administrators rubber-stamped this foolishness.
The inventory was buying and selling within the $600s after I first began slamming it. A yr later, its worth had been reduce in half. And by the tip of 2022, the inventory was buying and selling within the $130s.
However when Bitcoin hit a brand new all-time excessive final week, MicroStrategy soared to a 25-year excessive of over $1,800.
And a wager on it going again down is likely one of the greatest slam dunks I’ve seen available in the market.
The inventory worth is carefully tied to the worth of Bitcoin. If Bitcoin drops, MicroStrategy will tank. Bitcoin is risky, so sooner or later, it would head decrease. And it seems like that shall be sooner fairly than later, because the cryptocurrency has practically doubled in lower than two months and has tripled since October.
Plus, final week, rapper Drake posted a video of Saylor speaking about Bitcoin on his Instagram account, which has 146 million followers. It jogs my memory of the Matt Damon crypto.com business that aired proper round Bitcoin’s earlier peak. These sorts of issues – public endorsements from a few of the most well-known celebrities on the planet – don’t occur at bottoms. They occur close to tops.
However extra importantly, even when Bitcoin doesn’t drop, there’s nonetheless no purpose to personal MicroStrategy’s inventory.
[Editor’s Note: Since Marc finished writing this column on Friday, Bitcoin has dropped by nearly 3% and MicroStrategy has fallen by a whopping 16%.]
The corporate owns 205,000 Bitcoin, which has a complete worth of about $13.7 billion. The market cap of the inventory is $28.1 billion. In different phrases, shareholders are paying practically two occasions the worth of the Bitcoin the corporate owns.
If you would like publicity to Bitcoin, a greater possibility is to easily purchase a Bitcoin exchange-traded fund (ETF), just like the iShares Bitcoin Belief (Nasdaq: IBIT) or a number of others. These carefully monitor the worth of Bitcoin however don’t have an outrageous 2X valuation. The truth is, the ETFs are just about priced at their web asset values.
There isn’t any legitimate purpose to personal MicroStrategy’s inventory except you assume Saylor, the CEO, is an excellent dealer and also you’re snug with him regularly borrowing cash in an effort to purchase extra Bitcoin.
In early March, the corporate raised $800 million by providing convertible bonds. The aim of the brand new debt? To purchase extra Bitcoin. Then, final week, it introduced it was promoting one other $500 million of notes for the aim of… you guessed it, shopping for extra Bitcoin. In order that’s $1.3 billion in debt in only one month.
The true worth of this inventory – primarily based on the 205,000 Bitcoin that it owns – is $816, which is simply over half of what it’s buying and selling at now. And that’s with Bitcoin at all-time highs of just under $70,000.
“Wait!” you say. “What about MicroStrategy’s software program enterprise?”
Income was 14% decrease in 2023 than it was 10 years in the past, and free money movement was lower than $10 million.
Let’s be beneficiant and assign the corporate’s software program phase a price-to-cash movement (P/CF) ratio of 20. (Usually, I might give a struggling enterprise with declining money movement a a number of of 10 or much less, however like I stated, I really feel beneficiant at this time.)
So what may occur to MicroStrategy’s inventory if Bitcoin slips? Based mostly on the corporate’s holdings of 205,000 Bitcoin and the P/CF ratio of 20 for its software program enterprise, right here’s what the inventory must be price:
Chances are you’ll be considering, “I don’t personal MicroStrategy, so I don’t actually must be involved.”
Properly, plenty of mutual funds personal it.
The Constancy Canadian Development Firm Fund has a 1.3% allocation to MicroStrategy, which has an workplace in Ottawa. And the Constancy Small Cap Development Fund (FCPGX) has practically 1% of its belongings within the inventory.
The iShares Russell 2000 ETF (Nasdaq: IWM) additionally has 0.5% of its portfolio in MicroStrategy. Because it’s an index fund, it should follow the allocation of the Russell 2000 index, which incorporates the inventory.
MicroStrategy is in a number of different well-known indexes too, together with the Nasdaq Composite, the Russell 3000 and the S&P SmallCap 600. So any index fund or ETF that’s primarily based on these indexes may have some publicity to MicroStrategy.
The inventory dropped by greater than 80% final time. This time may very well be even worse.
We’ve seen this film earlier than. We all know the way it ends.
Not properly.