Even an old dog can learn some new tricks. Software firm MicroStrategy (MSTR 5.00%) has shifted gears and made purchasing bitcoin (BTC 3.82%) one of its primary goals. As of this writing, the company owned approximately 92,079 of the original cryptocurrency, and it just sold more debt to raise cash -- which it plans to use to buy more bitcoin.
The software company has been stuck in a rut for years, but a soaring crypto market has added new intrigue to the stock. Shares are up over 260% since the start of 2020, going from under-the-radar boring tech stock to blockbuster hit in a short span of time. If bitcoin and decentralized finance (or DeFi, currency not issued or controlled by a central bank) are your bag, MicroStrategy is worth a closer look.
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Buying bitcoin becomes a key tenet
MicroStrategy is one of the original business intelligence (BI) software providers, founded all the way back in 1989. It has innovated over the years, adapting to the cloud-computing era and improving the insightfulness of its data visualization suite for users. It's a crowded space, though, and the company faces off against Microsoft, IBM, and salesforce.com, to name just a few. As a result, MicroStrategy's growth has been stagnant for years. Revenue back in 2018 was $498 million, compared to $481 million in 2020.
Nevertheless, MicroStrategy is a profitable enterprise. Historically, it generates operating margins in the low-teen percentages, and at the start of 2020, it had over $400 million in cash and equivalents and no long-term debt. No longer a growing firm, it was time to start returning excess cash to shareholders and looking for other ways to maximize shareholder returns. Enter bitcoin.
A maverick in the Wild West crypto market
Over the summer of 2020, MicroStrategy unveiled its strategy to enhance shareholder value. First was the repurchase of $250 million of company stock -- at the time, about 20% of MicroStrategy's total market cap. The second half of its plan was to use another $250 million to purchase Bitcoin. The rationale? According to co-founder and CEO Michael Saylor at the time:
This investment reflects our belief that Bitcoin, as the world's most widely adopted cryptocurrency, is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash. Since its inception over a decade ago, Bitcoin has emerged as a significant addition to the global financial system, with characteristics that are useful to both individuals and institutions. MicroStrategy has recognized Bitcoin as a legitimate investment asset that can be superior to cash and accordingly has made Bitcoin the principal holding in its treasury reserve strategy.
In other words, Saylor and company decided bitcoin could produce more value over time than holding cash, equivalents, and bonds on its balance sheet. And because bitcoin and other cryptos can also double as a software platform (since digital currencies are just that -- software), they have uses beyond just a tender for business transactions. As a software firm itself, it isn't so unreasonable to think of a company like MicroStrategy converting its liquid assets into digital money and giving itself options down the road if bitcoin continues to gain traction and acceptance in the global economy.
The bet got bigger from there, though. MicroStrategy started raising more cash by selling debt and using it to purchase more bitcoin. It concluded 2020 with $1.125 billion in total bitcoin purchases. And given the fact Bitcoin is up some 270% since last summer, the speculative play has paid off thus far.
The rising price of bitcoin has emboldened MicroStrategy even more. At the end of March 2021, cash and equivalents totaled $82.5 million, bitcoin holdings were worth $1.95 billion, and debt used to buy the digital coins totaled $1.66 billion. Subsequent to the first quarter 2021 update, another $500 million in debt was issued, which the company intends to use for more -- you guessed it -- bitcoin. As of this writing (which is before MicroStrategy uses its latest $500 million debt issuance for cryptos), the company said it owned 92,079 bitcoins, which is worth $3.09 billion as of this writing.
A bitcoin-holding company with software riding sidecar
MicroStrategy now has an enterprise value of $6.06 billion, just over half of which is derived from the bitcoin on its balance sheet. That values the company at over 72 times trailing 12-month free cash flow. Perhaps the speculation has gotten out of hand, but this is still a profitable software firm that has gotten a huge bump from its (so far successful) bet on digital assets. Incidentally, first quarter 2021 software revenue increased 10% year-over-year to $123 million, and the company has generated $83.8 million in free cash flow over the last 12 months.
At this point, MicroStrategy is more of a bitcoin holding company with a middling software operation playing second fiddle. If bitcoin keeps rocketing higher, so will this stock. If it crashes and burns, so will the stock. Longer-term, the company could figure out some interesting ways to leverage its crypto holdings if it becomes a meaningful part of the global financial system. And along the way, taking on massive debt to place big bets on the future of finance is one way to get some PR. Maybe it will equate to higher software sales.
I'm not buying MicroStrategy stock at this juncture, but it's earned a spot on my watch list -- if for no other reason than its intriguingly aggressive approach to accumulating the world's first cryptocurrency.
