When this writer first read that MicroStrategy founder Michael Saylor was planning to sell $500 million in stock to inflate his Bitcoin stock, I thought it was another half-crazy bet from the leading crypto crusader and true believer.
After all, Saylor has already spent close to $4 billion amassing roughly 130,000 coins that are now worth a third less than he paid (read the full story of Saylor’s journey around bitcoin here). The gambling went so wrong that in the second quarter, Bitcoin’s back-to-back price got stuck on MicroStrategy with a loss of $918 million. Amid the wreckage, Saylor resigned as CEO to become the CEO of the enterprise software operator that controls the voting stakes he tightly controls. Between releasing the disastrous earnings and making the show, Saylor grabbed more headlines at the end of August when the Washington, D.C. attorney general unveiled a lawsuit accusing the illustrious promoter of evading $25 million in county taxes by falsely claiming he lived in Florida.
Then I thought again. What if MicroStrategy shares are so undervalued that they are less inflated than minted Bitcoin? In that case, Saylor might be smart about issuing new shares now, when he could sell them well above the basic value, and store the proceeds in something that, at least in some camps, is seen as a “solid asset?” He was using super-rich coinage to buy what was supposed to be a permanent store of value. Then, while MicroStrategy shareholders still have a great time, they will suffer less than if Saylor had not sold shares to buy more Bitcoin, simply providing the coins with today’s value.
The whole strategy seems outrageous. Bitcoin has proven to be the most volatile major asset class in history, and anything but a gold-like refuge in tough times. But if you combine this high-probability MicroStrategy dive into a deep dive, and Bitcoin has so far gone down, might at least stabilize or even go up, to make sure there’s a practically weird and surreal mix of factors, Saylor’s maneuver might sort of make money sense. It doesn’t make as much sense as selling all of his bitcoin tomorrow, collecting some cash on rainy days, and striving to revive a previously slow-growing but somewhat profitable software enterprise. But perhaps not as Duffy as it seems.
Saylor has floated expensive stocks before
In fact, this is not the first time that Saylor has orchestrated high-altitude stocks to buy bitcoin. From the time he started buying coins in August 2020 to June 2021, his stock jumped from under $150 a share to around $700, tracking the explosion in bitcoin. Saylor saw a great opportunity, and it passed. Over the next several months, he sold $1 billion worth of inventory at average prices of more than $700. As a result, the offer that would have reduced its shareholders by 66% before Bitcoin reduced earnings per share by only 12%. As one short seller told me, “Saylor would have been better off using his inflated stock to buy all his bitcoins than borrowing the $2.4 billion he would have to pay back.”
Here’s how the deal could actually mitigate what appears to be an inevitable drop in MicroStrategy stock. The only thing that would prevent a major drop is a jump in the bitcoin price, and the recent trend is not at all favorable. First, let’s examine the basics of MicroStrategy. As of mid-September 13, its bitcoin market cap is $2.63 billion, with an average price of $20,300 per coin. That’s just $230 million more than the $2.4 billion in balance sheet debt to secure the coins. What is the value of software work? It hasn’t grown in years, only made $19 million in pre-tax profits in 2021, and barely broke even in the first six months of 2022. (We’ll use pre-tax income instead of net income since MicroStrategy has taken giant tax losses forward which should That wipe out taxes for years to come.) But let’s assume the best case. Since 2016, her pre-tax earnings have averaged $52 million annually.
Again, MicroStrategy has not shown any ability to increase sales or profits. So we’ll apply a zero growth multiplier of 15 to these earnings. Hence, the software side of the business is worth approximately $780 million. (That’s 15 x 52 million dollars.) Add the bitcoin net worth ($230 million) to the earnings strength of the software business, and based on the fundamentals, MicroStrategy appears to be worth a market cap of close to $1 billion. The problem: MicroStrategy sells for a valuation of $2.66 billion, roughly 2.7 times that number.
Today, the number of its outstanding stake is 11.3 million. A year from now, for example, if MicroStrategy drops to a base value that includes Bitcoin still hovering at the current level of $20,300 or so, each share would be worth $88 (the $1 billion market capitalization divided by 11.3 million shares). It’s as if Saylor never proposed the new offer nor sold any additional shares.
At first glance, Saylor’s scheme looks like a disaster. It will float a boatload of 2.1 million new shares. Sales, headed by Cowen & Co. It will take place over a period of weeks and months. But for simplicity, we’ll assume he collected, on average, the September 13th price of $235. This is a significant dilution of 18.6%, bringing the total number of shares to 13.4 million. But keep in mind that he is using inflated inventory to buy something that may be less inflated. Keep in mind that in the middle of 2023 the software business is still worth $780 million, and the price of bitcoin is the same. MicroStrategy will own an additional $500 million in bitcoin, for a total of $3.16 billion, or $760 million more than $2.4 billion in debt. Finally, the MicroStrategy cap will be $760 million in Bitcoin plus $780 on the software side for a total of $1.54 billion. It will sell for $115 a share, nearly a third more than if Saylor hadn’t bought the coins! (This is a market capitalization of $1.54 billion on 13.4 million shares.)
It is clear that MicroStrategy investors will remain frustrated by the drop from $235 to $115, or just over half. But it’s still much better than going down from $235 to $88, which would happen at two-thirds if he didn’t take advantage of overvaluation to grab additional bitcoin.
Again, this exhaustive exercise only works if the bitcoin price remains at least at today’s levels. But Saylor’s scheme does not have to rise to a certain logic. Ultimately, though, this delirious maneuver, if successful, will only smooth out what could be a hard landing for MicroStrategy — unless, of course, bitcoin rises again. Of course, Saylor doubles down because he thinks it will. Barring a long- and wrongly predicted bitcoin miracle, MicroStrategy contributors will be paying a lot of time for Michael Saylor to fail into fanaticism.
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