MicroStrategy (MSTR 6.47%) it may technically be an enterprise software company, though founder and Chief Executive Officer Michael Saylor is increasingly fixated on Bitcoin (BTC 3.95%). The end result is MicroStrategy has taken nearly $4 billion real U.S. dollars and purchased more than 129,000 Bitcoins over the past two years.
However, MicroStrategy didn't buy Bitcoin with money it just had lying around -- the company borrowed most of it. One of its loans is at risk because the price of Bitcoin has plunged roughly 50% in the past three months. Thus a potential margin call is what investors are talking about these days.
And yet, I don't believe this is the biggest concern for MicroStrategy. The great investor Warren Buffett recently said something that all MicroStrategy shareholders should take to heart.
The truth about MicroStrategy's loan requirements
To start, let's clarify as many misconceptions as we can. Margin refers to money borrowed for the purpose of investing. However, the value of an investment can go up or down. Lenders have requirements on how much money you need to hold as collateral on the sidelines to satisfy your loan. But if the value of your investment goes down, your lender may require you to offer more collateral or you risk having your investments liquidated.
CRYPTO: BTC
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The market is worried about a possible margin call for MicroStrategy. Do an online search for Saylor's name, and "margin call" will pop up as a suggested search term.
Here's the context of this fear: On March 29, MicroStrategy announced that it had secured a $205 million loan from Silvergate Capital to buy Bitcoin. And it collateralized this loan with Bitcoin. On the conference call to discuss financial results for the first quarter of 2022, the company's chief financial officer said that if the price of Bitcoin fell to $21,000, it would receive a margin call.
This statement made headlines. However, there's more to it than this. MicroStrategy only used a small portion of its Bitcoin holdings to collateralize its loan. The price of Bitcoin is at about $21,000 as of this writing, meaning the company may need to provide more collateral to avoid liquidation. And according to the company's Q1 presentation, it has over 95,000 Bitcoins it can use to satisfy its lending agreement with Silvergate Capital.
Therefore, it's unlikely that MicroStrategy's Bitcoin position gets liquidated.
NASDAQ: MSTR
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The bigger problem for MicroStrategy
In an interview, Saylor once said, "The only use of time is how do I buy more Bitcoin?" But investors should be asking questions like, What does MicroStrategy plan to do with Bitcoin?
Saylor has bought as much Bitcoin as possible for billions of dollars. By contrast, Warren Buffett wouldn't buy Bitcoin for $25. At a recent shareholders meeting, Buffett said, "I wouldn't take it because what would I do with it? I'd have to sell it back to you, one way or another."
There are productive assets and nonproductive assets. Stocks are ownership stakes in businesses and are productive assets. As a part owner of the business, you partly own the cash flows. On the other hand, there are nonproductive assets like art and currencies, including cryptocurrencies. They might appreciate in value while you hold them. But they aren't producing anything in the interim.
You can do some pretty cool things with cryptocurrencies -- the Web3 space is littered with innovation. But Buffett has no intent to use Bitcoin or another cryptocurrency for innovative purposes. And if you're not using it, then eventually selling it to someone else for more money in the only way to profit from it.
Let's pretend all 19 million Bitcoins now in circulation were on sale for $25 and MicroStrategy bought them. We could say that Step One of the company's plan was complete. What exactly is Step Two?
Will MicroStrategy use the129,000 Bitcoins it now owns to expand its enterprise-software business? Saylor often talks about Bitcoin being a stronger currency than the U.S. dollar because of misguided federal monetary policy. But if MicroStrategy is simply trying to protect its purchasing power, what does it intend to purchase with the $4 billion it's dumped into Bitcoin so far?
This isn't any different from being critical of companies that hoard cash. Cash should be used to increase shareholder value. And the same applies here to MicroStrategy's Bitcoin position.
MicroStrategy's Bitcoin position likely won't get liquidated. But the company must answer these questions for shareholders at some point. It has more than $1.6 billion in convertible senior notes due in 2025 and 2027 that could dilute shareholder value. And it might dilute shareholders further to buy even more Bitcoin.
If you're bullish on Bitcoin, buy Bitcoin. But until there's a concrete plan in place for creating shareholder value with Bitcoin, MicroStrategy is a stock I'd avoid.
