MicroStrategy Deep Dive (Part 1)

MicroStrategy's stock price trades at a significant premium to its Bitcoin holdings, leading to questions about its valuation. The market anticipates either a substantial increase in Bitcoin's price or further Bitcoin accumulation by the company. The podcast explores how corporations like MicroStrategy obtain funds for Bitcoin purchases, including generating revenue, issuing debt, and issuing new equity, while discussing the potential risks and implications of each.

MicroStrategy's Valuation

• 00:01:29 MicroStrategy's market capitalization significantly exceeds the value of its Bitcoin holdings, indicating a premium valuation. The market appears to expect either a substantial increase in Bitcoin's price or further Bitcoin accumulation by the company. This premium is compared to the BlackRock Bitcoin ETF, which cannot trade at a premium due to arbitrage opportunities.

MicroStrategy's Bitcoin Funding

• 00:06:47 MicroStrategy can fund its Bitcoin purchases through various means, such as generating cash from its legacy software business and new Bitcoin initiatives. However, its operating cash flow is relatively low. Alternatively, it can borrow money through debt issuance, although excessive debt increases the risk of default. The company has also issued new shares, a tactic that dilutes existing shareholder value and profits.

Share Dilution

• 00:08:44 Issuing new shares can dilute existing shareholder value and profits, as demonstrated by Pfizer's stock performance. Apple, in contrast, buys back shares, increasing value and profits per share. MicroStrategy has issued a substantial number of new shares since 2020, which could negatively impact shareholder value. Despite this, the company's stock has performed exceptionally well.