What is MicroStrategy's strategy as a software company distracted by Bitcoin?

MicroStrategy is a well-known Bitcoin holder in the cryptocurrency community. Co-founder Michael J. Saylor often praises Bitcoin as digital gold, overshadowing the fact that MicroStrategy's core business is something else. Let's take a look at what this 33-year-old company, primarily focused on business intelligence (BI) software development, is actually doing. What is their business strategy behind holding Bitcoin?

What is MicroStrategy's core business?

MicroStrategy is a U.S. enterprise that provides business intelligence, data analytics, mobile software development, and cloud computing services. It was founded in 1989, went public in 1998, and its main competitors include Salesforce, IBM's Cognos, and Oracle's BI platform.

Business Intelligence (BI) was originally defined by the globally renowned IT research and consulting firm Gartner. It encompasses applications, infrastructure, tools, and best practices that enable organizations to improve decision-making and optimize performance through the exploration and analysis of information. In short, MicroStrategy is a platform that provides business intelligence to corporate users, from model building to data analysis, and even includes business model recommendations. Through easy-to-use visual analysis software, clients can instantly grasp the latest status of their companies. According to the Gartner 2022 report, MicroStrategy ranks first in enterprise analytics.

Believers in Bitcoin

Michael J. Saylor, the co-founder of MicroStrategy, is a staunch believer in Bitcoin. He has publicly stated multiple times that Bitcoin is digital gold and the scarcest asset in the world. Since September 2020, MicroStrategy announced its Treasury Reserve Policy, using Bitcoin as the company's primary reserve asset. Apart from cash flow generated by its core business, MicroStrategy continues to buy Bitcoin through debt and equity financing transactions.

Michael J. Saylor believes that the strategy of purchasing Bitcoin can enhance the company's reputation. The increase in software revenue from the core business allows MicroStrategy to buy more Bitcoin, creating a virtuous cycle and serving as the company's strategic focus. As of the deadline, MicroStrategy has purchased 132,500 Bitcoins, totaling $4.03 billion, with an average purchase price of $30,397 per Bitcoin, representing 0.688% of the total circulating Bitcoins of 19,256,650, making it the company with the largest Bitcoin holdings.

Is MicroStrategy profitable?

According to MicroStrategy's Q3 2022 financial report, let's examine whether MicroStrategy's core business is profitable. The table below summarizes the revenue and cost analysis from 2020/2021 to Q3 2022. MicroStrategy's gross profit margin is approximately 80%, making it a profitable company. After deducting operating expenses such as sales and marketing, the operating profit margin is 11.87%/9.02% and 1.81% respectively. It is worth noting that because MicroStrategy considers the purchase of Bitcoin as a key strategic development, the profit or loss from the fair value assessment of Bitcoin is also classified as operating expenses in the financial statements. Consequently, costs related to Bitcoin purchases and custody are included in administrative expenses.

How to buy Bitcoin?

In addition to using its own cash, MicroStrategy has been continuously purchasing Bitcoin through debt and equity financing transactions in recent years.

MicroStrategy raised approximately $2.4 billion through debt to purchase Bitcoin, with an average interest rate of about 2.16%. The earlier convertible bonds issued had interest rates close to zero but with provisions for additional interest under special conditions, which as of now, seem to not have been met based on the financial reports. The convertible stock prices calculated from the number of shares roughly range from $398 to $1,432 per share, but no conversions have occurred yet.

Regarding the secured loan with Silvergate due in 2025, it has a variable interest rate of SOFR 30-day average rate plus 3.75%, currently around 7.9%.

Note: SOFR is the New York Fed's daily published overnight secured financing rate, reflecting a broad range of overnight U.S. Treasury repurchase agreement activity.

MicroStrategy also raised funds through issuing new shares. In 2021, it issued 1,413,767 Class A shares through Jefferies LLC at a price of $727.64 per share, raising nearly $1 billion. In 2022, it signed new share sale agreements with Cowen and Company LLC and BTIG, LLC, issuing 218,575 Class A shares at an average price of $213.16, raising $46.4 million. According to the disclosed information in its financial reports, as of October 25, 2022, MicroStrategy has issued a total of 9,353,694 Class A shares and 1,964,025 Class B shares.

Investing in MicroStrategy as an alternative to investing in Bitcoin?

Michael J. Saylor has emphasized the importance of Bitcoin as a hedge against inflation. While holding physical Bitcoin requires creating a wallet through complex procedures and concerns about custody, investing in MicroStrategy stock to hold Bitcoin is a simpler way. However, does this strategy truly benefit investors?

By looking at the balance sheet in the following figure, it is evident that the Total Stockholders' Equity has turned negative, indicating that the company is in a situation of insolvency, mainly due to the significant drop in the value of Bitcoin.

Given that MicroStrategy is clearly in a state of insolvency, the strategy of allowing non-crypto investors to buy MicroStrategy stock to own Bitcoin seems unappealing. Although grayscale's Bitcoin spot fund GBTC has yet to be approved as an ETF to address its discount issue, there are already Bitcoin futures ETFs available on the market, and even asset management companies like Fidelity offer options for ordinary investors to directly invest in cryptocurrencies. While MicroStrategy entered the Bitcoin market early in 2020 and its stock price soared to $1,300 during the FOMO bull market, its first-mover advantage seems to have dissipated. Should MicroStrategy focus more on its core business to weather this crypto winter? Don't be that software company delayed by Bitcoin anymore!