MicroStrategy (MSTR -3.24%) has been public since the late 1990s. However, the company's aggressive foray into Bitcoin has made it a bonafide market beater in recent years; the stock has soared more than 700% over the past year alone and more than 2,600% since late 2019.
The company sells technology solutions, but it's become a self-proclaimed "Bitcoin treasury company." Thus far, shareholders have been lucratively rewarded by the company's vision for Bitcoin's future, as it continually accumulates Bitcoin with the hope that it becomes globally adopted as a digital source of value.
Its unique business model has made it controversial among investors. Can MicroStrategy help investors become millionaires with outsize long-term gains, or is this just a bubble waiting to burst?
Here is what you need to know.
Bitcoin's unknown ceiling makes it exhilarating and risky
MicroStrategy began as a software company that sells data analytics and intelligence technology. It hasn't abandoned that business, but the company is a Bitcoin story now. The software business generates a little under $470 million in annual revenue. If one values it at 10 times its revenue, that equates to a market value of about $5 billion. MicroStrategy's total market cap is about $95 billion today.
Since MicroStrategy's value is tied closely to Bitcoin's, investors should probably understand and believe in Bitcoin's value and utility to be interested in MicroStrategy's stock.
Bitcoin is the first cryptocurrency. It's a decentralized digital currency, meaning a central entity like a bank doesn't govern it. Instead, it uses blockchain technology, which essentially spreads the control and governing duties among its user base. It's like a public ledger. Every Bitcoin transaction is recorded on the blockchain for all to see and verify.
The debate with Bitcoin is that it's a digital asset. Its price depends solely on what someone else will pay, likening it to a digital version of gold. That's made Bitcoin highly volatile over the years, where its price will spike and crash:
Bitcoin Price data by YCharts
Nobody knows Bitcoin's ceiling, which makes it risky. Yet, there is a logical argument for its immense upside.
Unlike many fiat currencies, like the U.S. dollar, Bitcoin is anti-inflationary and has a finite supply (similar to gold). The upside potential is that the world increasingly uses Bitcoin, giving it value through its utility. And despite Bitcoin's staggering price action in recent months, the world's Bitcoin supply is still only worth $1.9 trillion, a fraction of the global gold supply, estimated at between $14.6 trillion and $21.9 trillion.
Is MicroStrategy a house of cards?
MicroStrategy is acquiring Bitcoin with cash flow from its software business, debt, and issued stock. With its Q3 earnings, the company announced a plan to raise $42 billion over the next three years to continue increasing its Bitcoin holdings. As of Nov. 11, MicroStrategy possessed 279,420 Bitcoins. Bitcoin's spot price is just under $100,000, so using that round number for simplicity, MicroStrategy's Bitcoin holdings have a market value of approximately $27.9 billion today.
Remember how I assigned a $5 billion value to the software business? That means MicroStrategy's Bitcoin assets ($27.9 billion market value) have translated to a roughly $90 billion market value for the company's stock. In other words, MicroStrategy's Bitcoin is trading at a massive premium to Bitcoin on the open market.
This generally isn't normal. The Grayscale Bitcoin Trust ETF, which accumulates and stores Bitcoin, trades roughly on par with the value of its underlying bitcoins, plus or minus a tiny bit. Maybe investors believe MicroStrategy can leverage its Bitcoin to create additional value and, thus, deserves a hefty premium.
However, I'm skeptical, and at the very least, a premium shouldn't be several times its Bitcoin's underlying value. If MicroStrategy's stock reflected the value of its Bitcoin holdings, shares would be somewhere around 70% overvalued today.
The stock can help make you rich, but there's a caveat
MicroStrategy's strategy to accumulate Bitcoin looks smart as long as the company can use 0% debt and issue stock at a massive premium to fund purchases of something that keeps increasing in value. But what happens when the pendulum swings the other way? It reminds me of investing in stocks using margin. It can supercharge your returns when it works, and your losses when it doesn't.
If Bitcoin eventually becomes a premier form of digital capital with worldwide utility, MicroStrategy's Bitcoin assets could pay off big-time for investors. But the timing of that playing out is anyone's guess. Meanwhile, the stock has arguably become a bubble because it has gotten way ahead of the underlying Bitcoin it represents.
I would avoid MicroStrategy for now. The massive premium to its underlying Bitcoin doesn't make much sense.
That said, Bitcoin has an infamously volatile history. Eventually, another cryptocurrency downturn may arrive. When it does, MicroStrategy is an intriguing investment idea with exciting potential -- at the right price.
