MicroStrategy (MSTR +1.73%), which went public in 1998, was once considered a slow-growth analytics software company. It was struggling to grow in a crowded market while keeping pace with nimbler cloud-based competitors like Salesforce.
That all changed in 2020, when MicroStrategy's co-founder and then-CEO Michael Saylor directed it to buy 21,454 Bitcoins (BTC +0.99%) for $250 million. It then accumulated more Bitcoin each year, and it held 450,000 Bitcoins as of Jan. 13.
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Those Bitcoins are now worth $46.82 billion, or 49% of its enterprise value of $94.69 billion. It paid an average price of $62,473 per Bitcoin ($27.95 billion) for that hoard, which is 40% less than its current price of around $104,000. That makes the company the world's largest corporate holder of Bitcoin.
Yet MicroStrategy's core software business is still barely growing, and it's constantly issuing more shares and taking on more debt to fund its Bitcoin purchases. That all-in bet on Bitcoin seems risky, but its stock has still soared 2,550% over the past five years as the cryptocurrency's price skyrocketed. Can MicroStrategy's stock soar even higher over the next five years?
NASDAQ: MSTR
Key Data Points
What's MicroStrategy's long-term strategy?
Saylor believes that Bitcoin's price can soar 12,400% to $13 million by 2045. Saylor expects Bitcoin to eventually grow from just 0.1% of the world's capital today to 7% as more financial institutions roll out Bitcoin-related services. He also expects Bitcoin to eventually trade at higher volumes than the S&P 500 as it wins over more investors.
Several other catalysts might lift Bitcoin to those levels. Its scheduled halvings, which reduce the rewards for mining by half every four years, will keep its supply tight and make it more comparable to gold and other precious metals. More retail and institutional investors could also invest in Bitcoin's spot price ETFs as a hedge against inflation. Bitcoin's growing reputation as a borderless "digital gold" could also drive more inflation-wracked countries to adopt it as a national currency.
Last October, MicroStrategy introduced a "21/21" plan to fund its future Bitcoin purchases. Under that plan, it will raise $42 billion ($21 billion in equity and another $21 billion in fixed income securities) by 2027. In other words, investors should expect it to dilute its existing shares and take on even more debt to buy more Bitcoin.
Is MicroStrategy's big Bitcoin bet sustainable?
At the end of 2019, MicroStrategy had $408 million in total liabilities on its balance sheet. That total didn't include any convertible notes, and it had a low debt-to-equity ratio of 0.8. But in 2020, its total liabilities more than doubled to $913 million -- including $486 million in convertible notes -- as its debt-to-equity ratio leapt to 1.7. That massive year-over-year increase in its leverage was driven by its first big Bitcoin purchase.
By the end of 2023, its total liabilities had risen to $2.6 billion, but it still had a manageable debt-to-equity ratio of 1.2. That's because it increased its total share count through new share offerings and the conversions of its convertible notes.
At the end of the third quarter of 2024, MicroStrategy's total liabilities surged to $4.57 billion as its debt-to-equity ratio held steady at 1.2. But investors should pay close attention to its share count, which increased by 122% over the past five years.
Simply put, MicroStrategy is betting that the value of its accumulated Bitcoin holdings will increase rapidly enough to cover its ballooning debt and justify its ongoing dilution. That's a bold bet, but MicroStrategy is buying and holding so much Bitcoin that it can move the price of the cryptocurrency on its own -- and those moves could draw in even more investors.
What will happen to MicroStrategy over the next five years?
MicroStrategy looks undervalued relative to its Bitcoin holdings, and its stock could soar even higher as Bitcoin gains even more momentum. The rising value of its Bitcoin holdings should completely overshadow its stagnant software business, which it's been trying to revive with stickier cloud-based subscriptions and generative AI tools.
Bitcoin has more irons in the fire than many other smaller cryptocurrencies. It should head higher over the next five years as it's more widely adopted by retail investors, institutional investors, companies, and even national governments. So as ridiculous as MicroStrategy's all-in bet on Bitcoin might seem, its stock could generate bigger gains by 2030, even as it takes on more debt to accumulate more coins. But if Bitcoin crashes, MicroStrategy's soaring debt and ongoing dilution will quickly crush its stock.
