Bet_Noire
The Quarter
MicroStrategy (NASDAQ:MSTR) reported one other lackluster operational quarter and actually unhealthy GAAP loss due to mark-to-market losses on its Bitcoin (BTC-USD) hoard. To the extent that any basic issues in any respect, these numbers by no means assist the present market cap. I am going to additionally add that the corporate’s unsecured bonds stay beneath par, implying zero worth for the fairness.
At this level, the software program enterprise solely issues as a means for the corporate to cowl curiosity prices on its debt and maybe a cause for administration to get inventory compensation (which I am going to deal with beneath). That mentioned, the software program enterprise remains to be moribund. The corporate likes to tout its subscriber development although it is nonetheless lower than 15% of income. Whole revenues had been down 1% for the quarter. Even being very beneficiant and utilizing fixed foreign money (with out utilizing the identical on bills) income development is uninspiring at 4%.
MicroStrategy Income Breakdown (This autumn Earnings Presentation)
The corporate makes you’re employed to determine bills excluding the noise within the Bitcoin markdowns, however utilizing the beneath, working bills got here in at $112 million versus $113 million final yr, with some financial savings on the gross sales and advertising and marketing line (doubtless a foreign money profit). Placing that collectively means about $20 million of EBITDA for the quarter and $80 million for the yr. I believe that means the core software program enterprise is price about $500 million at finest.
MicroStrategy Bills Breakdown (This autumn Earnings Presentation)
Working a moribund software program enterprise and operating an underwater, large leveraged guess on Bitcoin (even after the rally yr to this point) would not strike me as one thing that warrants enormous compensation to administration. This administration definitely disagrees. They paid out about $63.6 million in inventory compensation in 2022 with This autumn being the most important quarter of the yr at $17 million. Name me loopy, however I consider a administration staff whose bets on Bitcoin value buyers about $4 billion final yr would not deserve such riches.
Inventory Compensation by Quarter (This autumn Earnings Presentation)
Results of the Rally
As of the shut going into earnings, Bitcoin had rallied about 42% yr to this point. That transfer added ~$945 million ($7,005 x 135,000) to the worth of the corporate’s holdings. Utilizing $292.13/share (closing worth going into earnings) MSTR’s market cap grew $1.7 billion ($150.56 x 11.3 million shares) yr to this point. In some way each greenback of Bitcoin’s rally translated into $1.80 of rally in MSTR inventory.
I’ve talked about MSTR bonds in prior articles. The inventory rally has led to a transfer increased to the mid-$80’s within the .75% 2025 convertible bonds (the inventory is approaching the conversion worth). The 2027 convertible bonds are a lot farther away from the conversion worth and subsequently are nonetheless within the $40’s. Extra importantly, the 2028 secured bonds, which have a lien on a selected variety of Bitcoin and the software program operations of the corporate, are nonetheless within the low-$80’s and yield about 9.5%. I am going to restate that: secured lenders have so little religion on this firm’s prospects and the safety from Bitcoin are demanding 9.5% (virtually 6% increased than treasuries) to lend to this firm. Regardless of this concern amongst bondholders, shareholders have granted the corporate about $750 million of extra premium from this yr’s rise within the firm’s Bitcoin.
Dangers
The dangers to enjoying with any firm with a valuation that makes no basic sense is that valuation can get extra out of whack. If you are going to play from the brief facet, you need to construction trades that cap your draw back in a rally. I additionally suggest sweeping earnings when the inventory breaks down. There was an epic rally within the worst high quality/most speculative shares this yr. I consider a lot of that rally has been pushed by a rising view that the Fed would minimize rates of interest later this yr. If rates of interest proceed to rally, shares like MSTR may commerce increased or at the least not break down. If the other occurs, look out beneath.
Conclusion
No one who owns MSTR has articulated cheap justification, for my part, why they select to make a play on Bitcoin with an overleveraged, underwater car that costs excessive administration charges (see the inventory comp portion of this text) as a substitute of simply shopping for Bitcoin on margin at a brokerage account at someplace like Interactive Brokers (IBKR). They definitely cannot clarify why they’re giving $1.80 of market worth for each $1 acquire in Bitcoin. In my view, this inventory is for individuals who neither respect danger, valuation or administration high quality. Shares like MSTR work when animal spirits have untethered the market from any sort of financial or basic actuality. It could possibly repay to simply shut your eyes, throw cash into the market and hope for the perfect. I think about {that a} recipe for catastrophe, however some folks deal with the market extra like a on line casino than a spot to rigorously make investments capital.