MicroStrategy (MSTR +0.44%) has been one of the most unlikely winners in the software sector in recent years.
The company has evolved from an enterprise analytics software company to primarily a Bitcoin (BTC +1.68%) treasury company, and its investments in the cryptocurrency explain why the stock has soared in recent years. You can see its performance in the chart below. It's not only beaten the S&P 500 but also the digital token itself.
MicroStrategy has essentially transformed itself into a leveraged Bitcoin exchange-traded fund, and that helps explain why the stock skyrocketed in late 2024.
MicroStrategy's Bitcoin strategy
MicroStrategy started buying the crypto in 2020, selling debt and equity and using the funds to buy it. CEO Michael Saylor has become one of the biggest evangelists for it, and the software part of the business now seems negligible.
As of the end of the third quarter, MicroStrategy owned 252,220 bitcoins for which it paid a total of $9.9 billion, or $39,266 per coin. The market value for those is roughly $26 billion today.
It continued to raise capital in the third quarter, with a $1.1 billion secondary equity offering and $1.5 billion in debt.
NASDAQ: MSTR
Key Data Points
While that strategy has paid off thus far, the company's valuation has gotten disconnected from even the value of its crypto holdings. As of Jan. 23, it had a market cap of $91 billion even though its Bitcoin holdings are only worth roughly $26 billion, at least as of the end of the third quarter.
The rest of the business is not worth much. It generated $116.1 million in revenue in the third quarter, down 10% from the quarter a year ago, and it reported an adjusted profit of just $900,000 in the third quarter.
The money raised to buy Bitcoin isn't free, either. MicroStrategy now has $4.2 billion in debt on its balance sheet, and its shares outstanding have increased significantly since it began its crypto strategy, up nearly 40% over the last year to 197 million shares.
So MicroStrategy is now valued at more than three times its digital holdings, which have cost the business in debt and equity dilution.
In some ways, it makes sense that MicroStrategy would be valued at the premium compared to Bitcoin. The company has the ability to add to its holdings and permission to raise capital to do so, unlike most crypto vehicles. If you believe that the price of the digital coin will keep going up, then MicroStrategy is a smart buy, since that will only validate its approach and make its holdings more valuable.
However, the flip side of that strategy is highly risky. If the price of Bitcoin plunges, MicroStrategy stock will tumble with it, and if the value of its crypto falls below its debt, the company could even become insolvent. Given its volatile swings, it seems likely that the price will fall below the average price of $60,839 that MicroStrategy has paid for it at some point.
Image source: Getty Images.
Is MicroStrategy a buy?
MicroStrategy's value will continue to be tied to Bitcoin, but with its premium to the cryptocurrency already looking stretched at more than three times, its upside potential seems limited, at least relative to that of the cryptocurrency.
Short-seller Andrew Left attacked the stock in November with similar logic, and that argument seems valid. And it is much easier to buy Bitcoin than it was when MicroStrategy began buying it, so there's no need to buy the stock to get exposure to the digital coin.
Ultimately, potential MicroStrategy buyers need to ask themselves why they would buy the stock instead of Bitcoin, and at the current price, the answer doesn't seem very compelling.
