MicroStrategy
shares continued their 2024 rally to a record high, rising in sympathy with
Bitcoin
prices and leaving the company at what appears to be a big premium to the value of its holdings of the cryptocurrency.
The run-up could make the stock vulnerable to a pullback, particularly if Bitcoin retreats. The stock has outpaced the currency this year, more than doubling in price while Bitcoin was up about 60%, Bloomberg data show.
A move by the company on Monday appeared to position it to take advantage of its elevated stock price. After the close of trading, MicroStrategy disclosed a proposed offering of $600 million of convertible debt due in 2030 through a private placement to qualified institutional buyers through Rule 144A. It plans to use the money to buy more Bitcoin and for general corporate purposes.
The convertible debt likely will be exchangeable for MicroStrategy at a premium to Monday’s closing price. Given that another hot stock,
Super Micro Computer,
recently issued convertible debt at a zero-percent rate, the MicroStrategy debt could carry an interest rate of 1% or less.
MicroStrategy, known as a Bitcoin play because the company has accumulated more of the coins than any other corporation, ended the Monday session up 24% at $1,334.01. It now has more than doubled so far this year, exceeding the record price reached in late 2021. Much of the gain has occurred in recent weeks.
The shares traded down in after-hours trading Monday on news of the convertible deal, falling 4.4% to $1,276. Convertible arbitragers may be shorting the stock ahead of the planned bond deal.
Bitcoin prices have rallied as well, with the digital currency gaining 8% to $67,935 Monday, according to Bloomberg. Bitcoin is near its 2021 peak of about $69,000.
As of Feb. 25, MicroStrategy held around 193,000 bitcoin according to a recent 8-K filing with the Securities and Exchange Commission. It purchased about 3,000 Bitcoin from Feb. 15 through Feb. 24, financed in part with an equity sale.
The point to note is that MicroStrategy’s market capitalization is far greater than the value of the Bitcoin it holds. Barron’s estimates that the Bitcoin holdings are worth about $13 billion at the current Bitcoin price, while the company also has a software business that Benchmark analyst Mark Palmer recently valued at nearly $800 million.
All that adds up to $13.8 billion. Subtracting Microstrategy’s roughly $2.2 billion of debt suggests that the company’s net value is about $11.6 billion, which is just over half of the company’s market value of more than $22 billion.
Barron’s calculated that number is based on roughly 17 million shares outstanding—the share count in the company’s 10-K from early February, plus a small amount of stock issued last month. The company didn’t immediately respond to requests for comment on its share count or its valuation.
MicroStrategy has traded at a premium to the value of its bitcoin holdings for some time, but the gap has grown far wider as the stock has risen sharply over the past two weeks. On Feb. 22, BTIG analyst Andrew Harte calculated the premium at 1.3 times or about 30%, when MicroStrategy traded at $672, or half the current price.
The stock now has exceeded the target price of $990 that Benchmark’s Palmer set on Feb. 27 when he initiated coverage of MicroStrategy with a Buy rating. That call was based on a Bitcoin target price of $125,000 by the end of 2025, compared with just under $55,000 at the time of his report.
Some cryptocurrency participants thought the recent introduction of low-fee Bitcoin exchange-traded funds like the
iShares Bitcoin Trust
would reduce investor demand for MicroStrategy by diminishing the scarcity value of the company as a Bitcoin play. But investors are piling into the stock.
“While some observers have suggested that the introduction of spot bitcoin ETFs in the U.S. would weigh on MSTR’s share price, since equity investors who bought the stock as a bitcoin proxy have a new array of such proxies to choose from, the stock continues to offer investors a unique value proposition, in our view,” Palmer wrote.
He cited the company’s ability to use proceeds from debt and equity sales to fund Bitcoin purchases, as well as its software business. Given its debt, MicroStrategy offers a leveraged Bitcoin play. Investors also can purchase options on the stock.
Investors have some reason to expect Bitcoin to rise because the amount of the currency released into circulation is expected to halve starting in April, as it does every four years.
About 19.6 million Bitcoin are in circulation, with just 1.4 million left to be mined and released, according to a research note from Palmer. He wrote that bitcoin has “rallied meaningfully” after prior halvings in 2012, 2016, and 2020.
MicroStrategy billed itself as a “bitcoin development company” on its earnings conference call in early February, citing activities in “financial markets, advocacy and technology innovation.” The company has proven itself adroit at accumulating a large Bitcoin holding at an attractive average price of about $31,000, but investors appear to be paying a very hefty premium to get exposure to the currency through its shares.
MicroStrategy indeed is capitalizing on the high stock price with the planned convertible bond deal. That’s a sign that the company thinks the stock is fully priced.
For Bitcoin bulls, a low-cost ETF could be a better bet.
Write to Andrew Bary at andrew.bary@barrons.com
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