Shares of MicroStrategy (MSTR 3.38%) jumped on Wednesday after the company announced it had spent a whopping $615.7 million buying Bitcoin (BTC -1.87%). As of 2:15 p.m. ET, MicroStrategy stock was up about 9%.
The Bitcoin strategy
MicroStrategy first started buying Bitcoin as its capital-allocation strategy in 2020. Since then, the company used virtually all of the money it had and took on debt to buy as much Bitcoin as possible. That's why its greater-than $600 million purchase is so surprising -- it only had $45 million in cash as of the third quarter of 2023.
As it turns out, MicroStrategy just sold over 1 million shares, raising $610 million. This supplied the funds to buy Bitcoin.
With its latest purchase, MicroStrategy owns over 189,000 bitcoins and has purchased them for an average price of $31,168 per coin. Considering Bitcoin is currently valued at around $43,000 per coin, MicroStrategy has over $2 billion in unrealized gains.
Is this good for shareholders?
What's crazy is that when MicroStrategy first decided to buy Bitcoin, its market capitalization was lower than $2 billion -- less than its current gains from Bitcoin. In short, its capital-allocation strategy has delivered massive increases in shareholder value, and it's why the stock is beating the market.
That said, I continue to wonder what MicroStrategy's end game is. The company is a software business. But Q3 revenue was only up 3% year over year, and it has ongoing losses. While its unrealized gains from investing in Bitcoin are enormous, it's not communicating a plan to ever sell or use its Bitcoin in a way that grows the core business.
I believe Bitcoin could soar in 2024, and MicroStrategy stock would also likely post huge gains if that happens. But its Bitcoin is just sitting there and not doing anything else for the company. Therefore, I'm not sure I'd bet on MicroStrategy stock for the long term even if the coming year looks promising.
