MicroStrategy: There are better alternatives to own Bitcoin (MSTR)

Eoneren

Analysis of MicroStrategy Incorporated (NASDAQ: MSTR) using a sum-of-parts valuation, I believe the company is overvalued by more than 60%. Even if one is bullish on Bitcoin (BTC-USD), there are a multitude of ways to gain exposure without having to pay the exorbitant premium to the NAV of MSTR shares. Bitcoin is unlikely to recover sustainably until macro risk appetite improves. Investors can monitor this by looking at the ratio of the Invesco S&P 500 High Beta ETF (SPHB) to the Invesco S&P 500 Low Volatility ETF (SPLV) ETFs.

Brief company overview

MicroStrategy Incorporated, led by its mercurial president Michael Saylor (formerly CEO), is a business intelligence software company that also owns ~130k Bitcoins.

MSTR, once a sleepy small-cap survivor of the dot-com bust, adopted its famous Bitcoin strategy shortly after the COVID pandemic. First, he spent a portion of his cash reserves to purchase ~21k Bitcoins in August 2020 at ~$11,600/Bitcoin. After depleting its cash reserves, MSTR went even further, issuing more than $2 billion in debt to acquire even more Bitcoins (Figure 1).

MSTR Balance Sheet

Figure 1 – MSTR Balance Sheet (tikr.com)

Ultimately, the company has acquired approximately 130,000 Bitcoins worth $4 billion, financed through multiple debt issuances.

Stock price rode the Bitcoin rocket

MSTR’s stock price rode the Bitcoin rocket, reaching a peak of $1,315 in early 2021, almost 10 times its pre-pandemic range of $115 to $165 (Figure 2).

MSTR price chart

Figure 2: MSTR benefited greatly from the rise in the price of bitcoin (Author created with price chart from stockcharts.com)

MSTR’s rise was even more notable, given that the price of Bitcoin only increased from ~$11,000 when MSTR first bought them, to $45,000 when MSTR peaked at $1,315.

Part of the reason for MSTR’s meteoric rise was scarcity. At the time, MSTR was one of the few vehicles that investors could use to speculate on the price of Bitcoin. In effect, MSTR trades like a Bitcoin ETF, with a significant premium to its “Net Asset Value”.

However, as 2021 progressed, crypto investors began to have more investment options. First, ETFs like Purpose Bitcoin ETF (BTCC:CA) containing Bitcoins began trading on Canadian exchanges. Additionally, crypto exchanges like Coinbase (COIN) became popular, giving investors direct access to crypto assets. Eventually, ETFs such as the ProShares Bitcoin Strategy ETF (BITO) were launched on US exchanges giving investors exposure to Bitcoin through futures contracts.

With so many ways to gain exposure to cryptocurrencies and Bitcoin, why would anyone need to buy MicroStrategy stock?

Sum-of-the-parts valuation suggests stocks are 60% overvalued

Valuing MicroStrategy using a sum-of-parts analysis, assuming the enterprise software business is trading at 2.75x price/sales (business was trading between 2.5 and 3.0x price/sales prior to the adoption of the Bitcoin strategy) I can think of an equity value of $139/share. With the stock currently trading at $226/share, I believe they are overvalued by more than 60%.

MSTR Sum of Parts

Figure 3 – MSTR Sum-of-Parts Titration (Created by the author)

Bitcoin highly correlated with risk appetite

Setting aside the bull case for Bitcoin, whether one believes it or not, we can see in factual evidence that Bitcoin prices are highly correlated with risk appetite, as measured by the ratio of the Invesco S&P 500 High Beta ETF to the Invesco S&P 500 Low Volatility ETF. Figure 4 shows the ebbs and flows of the Bitcoin price as the SPHB/SPLV ratio goes up and down.

SPHB/SPLV

Figure 4 – Risk appetite measured by SPHB/SPLV (Author created with price chart from stockcharts.com)

Currently, risk appetite remains on a downward trend, hampered by the Fed’s interest rate hikes and tightening financial conditions. Until the macro situation changes, Bitcoin is unlikely to experience a sustainable rally.

Risk to my call

The risk of my cautious decision is obviously that if the price of Bitcoin goes up sustainably, then my bearish view on MicroStrategy will prove wrong. I believe investors can hedge against this risk by trading MSTR pairs against an asset that has positive leverage on Bitcoin prices. For example, if we go long the BITO ETF (BITO trades near its NAV) and short MSTR, we can hedge most of Bitcoin’s risk and just bet that the premium of MSTR to the NAV will decrease over time. .

Investors who are bullish on Bitcoin may even want to bet on Grayscale Bitcoin Trust (OTC:GBTC), as it is currently trading at a 37% discount to NAV (Figure 5). Historically, when Bitcoin was in a bullish phase, GBTC had traded at a NAV premium of up to 30% (Jan 2021). However, GBTC has a problem in that the trust currently does not have a built-in mechanism to close its discount to NAV. There was hope that the proposed conversion of GBTC to be an ETF would close the discount, however, to date, the SEC has denied GBTC’s proposed conversion.

Discount GBTC to NAV

Figure 5 – Discount GBTC to NAV (greyscale.com)

Investors should be aware that any pairs trading strategy will involve shorting MSTR, which can introduce idiosyncratic risks associated with shorting meme-like stocks like MSTR.

conclusion

I think MSTR is overvalued by more than 60% if we look at the company using a sum of parts valuation. Even if one is bullish on Bitcoin prices, there are a multitude of ways to gain exposure without paying the exorbitant NAV premium on MSTR shares. For example, investors can choose the BITO ETF which trades at NAV, or the GBTC Trust which trades at a 37% discount at NAV.

In my opinion, Bitcoin is unlikely to recover sustainably until macroeconomic risk appetite improves. Investors can monitor this by looking at the SPHB to SPLV ETF ratio.

Leave a Comment