MicroStrategy (MSTR -3.24%) began acquiring Bitcoin (BTC -2.12%) four years ago, and since then, its stock provided its investors with a mind-boggling 2,700% return. The company currently holds 402,100 Bitcoins, presently valued at $39.1 billion, and the cryptocurrency surpassed $100,000 for the first time (although it dipped below that level at the time of this writing).
For investors interested in seeing if MicroStrategy's rise is a fluke or just the beginning, let's explore how and why MicroStrategy is hoarding Bitcoin and its future prospects to see whether MicroStrategy stock is a buy, sell, or hold.
Here's the backstory behind MicroStrategy's Bitcoin investment
Prior to August 2020, MicroStrategy concentrated on its primary role as a provider of enterprise software for business-to-business solutions. However, with sluggish revenue growth and surplus cash reserves, Michael Saylor, the company's former CEO and current executive chairman, chose to allocate $250 million of MicroStrategy's funds into Bitcoin. This move made the company the first publicly traded firm to make such an investment.
The decision paid off handsomely for MicroStrategy, considering the company has acquired 402,100 Bitcoins for approximately $23.4 billion at an average price of $58,263 per Bitcoin. With Bitcoin trading at around $97,200 as of this writing, MicroStrategy could liquidate its entire Bitcoin holdings, resulting in a roughly $15.7 billion profit.
Here's how MicroStrategy is buying Bitcoin
MicroStrategy's core enterprise software business essentially become a footnote in the company's story. For its most recently reported quarter, it generated only $116 million in revenue, representing a 10.3% year-over-year decline.
Instead of using funds from its core business, the company has been raising debt and selling convertible notes -- loans that allow the noteholder to convert their loan into an equity stake in the company -- to fund Bitcoin purchases. And lately, as MicroStrategy's stock surged, its management has taken advantage of convertible notes at a 0% interest rate.
Before its initial Bitcoin purchase, MicroStrategy had $531 million in net cash, which has worsened to $4.2 billion in net debt as of Q3 2024. Its outstanding shares have exploded from 96.9 million to 234.2 million shares, or an increase of 141.7%, meaning investors' ownership stakes have been reduced by nearly 60%.
The share dilution is expected to continue, with the company assuming its outstanding shares will reach 270.2 million by 2032 from its current convertible notes.
Putting it all together, MicroStrategy's market capitalization is approximately $91.1 billion, and it holds $39.1 billion worth of Bitcoin. However, it is even more lopsided once you calculate its assumed diluted shares of 270.2 million. In that case, MicroStrategy would have a market capitalization closer to $105.1 billion, and once you add its net debt of $4.2 billion, you will get an adjusted enterprise value of $109.3 billion.
What is BTC Yield, and why is it important to MicroStrategy?
Given MicroStrategy's unprecedented bet on Bitcoin, it's a difficult stock to value and project. So, management came up with a metric known as BTC yield, which represents the percentage change period-to-period of the ratio between its Bitcoin holdings and its assumed diluted shares outstanding as a way of attempting to justify its lopsided enterprise value to its Bitcoin holdings.
As of Dec. 1, 2024, management claims its BTC yield year to date is 63.3%. On MicroStrategy's most recent quarterly earnings call, management gave context to the new metric: "BTC yield is not actually a yield in the traditional sense; we internally think about this metric as some might think about a bond yield or a yield of another financial instrument."
Recently, MicroStrategy management stated it is targeting its annual BTC yield to be between 6% and 10% over the next few years, an increase from its previous guidance of 4% to 8%.
It's still relatively early in MicroStrategy's game-changing bet on Bitcoin, so whether or not BTC yield proves to be an efficient way to value the company is largely undetermined, but it could be a starting point for investors.
Is MicroStrategy stock a buy?
According to FactSet, a financial data and software company, MicroStrategy is more volatile than any stock in the S&P 500. To invest in MicroStrategy at this stage, you must also believe in Bitcoin's long-term success, which many still consider a speculative asset despite its recent gains.
The good news for MicroStrategy is that, as of Sept. 30, 2024, 100% of its Bitcoin holdings were unencumbered, meaning the company wouldn't be forced to sell any of its Bitcoin in a downturn.
Moving forward, the company will likely soon purchase an additional $11.3 billion of Bitcoin as part of its most recent convertible notes offering. Also, management announced a "21/21 Plan," which intends to raise $42 billion of capital ($21 billion of equity and $21 billion of fixed-income securities) over the next three years to purchase more Bitcoin.
The bottom line is that MicroStrategy's bet has paid off handsomely so far, but it's largely unclear what would happen if the price of Bitcoin cratered. For Bitcoin optimists, it may make more sense to buy the cryptocurrency directly or a Bitcoin exchange-traded fund because MicroStrategy's lopsided gap between Bitcoin holdings and its enterprise value combined with its continued share dilution doesn't add up at the moment.
