Can the Purchase of MicroStrategy Stock Still Be Justified?
Crypto coin is on the rise again. Its price recently surpassed $90,000, setting a new all-time high. Over the past five years, it's seen a nearly 1,000% increase. This is music to the ears of MicroStrategy (MSTR -0.04%) and its former CEO, Michael Saylor. As a company that has transformed into a Bitcoin investment vehicle, MicroStrategy has seen a nearly 400% gain and is now looking to expand its Bitcoin holdings even further.
Saylor predicts Bitcoin could reach a price of $13 million by 2045. While that might sound far-fetched, considering he was onto something in 2020 when he started using MicroStrategy's funds to buy large amounts of Bitcoin, it's hard to dismiss his optimism completely.
Given its current Bitcoin holdings and strategies, is it too late to invest in MicroStrategy stock, or should you consider buying shares to ride the Bitcoin bull run?
All-in on Bitcoin
Originally a software business, MicroStrategy still operates in this sector. However, its quarterly revenue is only around $100 million, making it insignificant compared to its $67 billion market cap. The majority of its value comes from the Bitcoin it holds on its balance sheet.
As of its latest update, MicroStrategy owns 279,420 Bitcoins, worth around $25 billion in total. It obtained these funds through taking on a lot of debt (ending Q3 with $4.2 billion in long-term debt) and by issuing continuous stock offerings (resulting in an 85% increase in the number of MicroStrategy shares outstanding over the past three years).
While these figures might seem substantial, MicroStrategy believes its Bitcoin strategy is far from over. In its latest earnings report, it announced its "42" strategy, which involves borrowing $21 billion and raising an additional $21 billion through secondary stock offerings, all for buying more Bitcoin. At current Bitcoin prices, this would increase its Bitcoin holdings from $25 billion to $67 billion. With a current Bitcoin market cap of $1.74 trillion, a $67 billion position would represent around 4% of all Bitcoin in circulation, making MicroStrategy one of the most ambitious Bitcoin investors worldwide.
Disparate valuations
So far, the Bitcoin buying strategy has been successful, but MicroStrategy's market cap appears to have outpaced reality. When considering its debt, MicroStrategy's net asset value (NAV) is roughly $21 billion, but its market cap is $67 billion—more than triple its NAV. It's important to note that MicroStrategy's operating business holds little relevance to its overall value. Investing in MicroStrategy is essentially a bet on its ability to buy Bitcoin and the subsequent appreciation of its Bitcoin holdings.
Presently, the market is placing a significant premium on these holdings compared to buying Bitcoin directly from exchanges like Coinbase. Financially, it's a riskier proposition to bet on MicroStrategy, which involves relinquishing control of your Bitcoin assets to Saylor while he dilutes shareholders and acquires more debt.
Should you invest?
Investors might wonder if MicroStrategy stock's impressive performance could continue if Bitcoin surpasses the $100,000 mark. However, it doesn't necessarily mean MicroStrategy is a sound investment. Instead of investing in Bitcoin through an inflated stock with a market cap three times its net asset value, consider buying Bitcoin directly. This approach ensures your returns will mirror Bitcoin's price movements, eliminating the added risk of relying on Saylor's management and debt strategy.
Of course, cryptocurrencies are not mandatory investments. Ultimately, the choice is yours—whether to hop on the Bitcoin trend or stay on the sidelines. If you decide to invest, buying Bitcoin directly can offer a more secure and direct approach to this digital gold rush.
Given MicroStrategy's significant Bitcoin holdings and plans to further invest, the company's performance is heavily dependent on the future price of Bitcoin. This situation opens up an opportunity for individuals interested in investing in the cryptocurrency market, as they can consider purchasing MicroStrategy stocks or buying Bitcoin directly from platforms like Coinbase.
Deciding between investing in MicroStrategy stock or purchasing Bitcoin directly depends on one's risk tolerance and belief in MicroStrategy's management strategy. While investing in MicroStrategy offers potential gains from its Bitcoin holdings and any future price increases, it also involves inherent risks associated with a company's debt, shareholder dilution, and reliance on Saylor's management decisions. On the other hand, buying Bitcoin directly on platforms like Coinbase provides investors with more direct control over their investments and avoids potential complications associated with investing in a company.
