Bitcoin takes me to the moon! What exactly is MicroStrategy's Bitcoin strategy?

Michael Saylor, the co-founder of Microstrategy, is a staunch believer in Bitcoin, often emphasizing its importance on various programs, overshadowing the fact that Microstrategy is actually a 34-year-old business intelligence (BI) software company. With the recent surge in Bitcoin value, Microstrategy's stock has outperformed Bitcoin! Let's take a closer look at the business strategy behind Microstrategy's Bitcoin holdings.

MicroStrategy's Bitcoin Strategy

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

Michael Saylor believes that the strategy of purchasing Bitcoin can enhance the company's visibility. The increase in the company's core software revenue allows MicroStrategy to buy more Bitcoin, creating a virtuous cycle and serving as the core strategy of the company. However, upon examining its financial statements, the core software revenue has not seen significant growth. Essentially, MicroStrategy relies on issuing bonds and new shares to purchase Bitcoin.

The table below summarizes the revenue and cost analysis from 2020 to Q3 2023. MicroStrategy's gross profit is approximately 80%, making it a profitable company. However, the operating profit margin has been decreasing year by year, with only 1.17% remaining in the third quarter of this year after deducting the impairment of digital assets such as Bitcoin. It is worth noting that since MicroStrategy views the purchase of Bitcoin as a crucial strategy for the company's development, the impairment of digital assets related to Bitcoin market price evaluation is also included in operating expenses in the financial statements. Consequently, costs related to Bitcoin purchases and custody are also included in administrative expenses under operating costs.

Acquiring Bitcoin through Issuing Bonds and New Shares

According to MicroStrategy's Q3 financial report, the company has issued a total of $2.2 billion in bonds and $1.87 billion in stocks since 2020 to fund the purchase of Bitcoin.

Average Bond Interest Rate of 1.61%, Mostly Convertible Bonds

Starting from October 2020, MicroStrategy began issuing bonds. The initial two bonds were convertible bonds with very low interest rates, providing investors the opportunity to convert bonds into MicroStrategy's equity.

Subsequent bond issuances had interest rates exceeding 5%, all secured by Bitcoin. However, the overall average interest rate stood at 1.61%. In the current high-interest-rate environment where financing rates easily exceed 7%, MicroStrategy's financing costs are comparatively lower.

Note: The following image shows a list of bond issuances compiled from the financial report. The total amount of $21.8 billion slightly differs from the initial bond issuance amount of $2.2 billion due to net book value adjustments.

Continuous Issuance of New Shares, Beneficial for Existing Shareholders?

Due to the recent high-interest rates, MicroStrategy decided to use issuing new shares as a means to replace issuing bonds. Since MicroStrategy does not need to pay dividends to shareholders, the cost is naturally much lower. The image below illustrates the costs of issuing new shares since the third quarter of 2021, with costs per share ranging from $213 to $728. It is evident that shareholders who subscribed to new shares during the bull market have yet to break even.

The primary advantage of issuing new shares for the company is the avoidance of interest expenses. However, for existing shareholders, this action dilutes their equity and reduces earnings per share. To simplify, if a company earns $100 per year and used to distribute it to 10 shareholders, but now must distribute it to 14 shareholders, it is naturally unfavorable for existing shareholders. This directly affects the earnings per share (EPS), a metric commonly used to evaluate stock prices. If EPS decreases, it may impact expectations of the stock price, leading to a decline.

Overall, MicroStrategy has issued approximately 4.46 million new shares in recent years, resulting in an expansion of share capital by over 40%!

Debt-to-Equity Ratio Soars to 301%

Traditional finance often uses the debt-to-equity ratio to assess a company's financial structure's soundness. Typically, a company's fundraising channels involve debt and equity issuance. When shareholders are optimistic about a company's prospects, they are usually willing to contribute more funds to participate in the company's future growth. A higher debt-to-equity ratio indicates a higher reliance on debt and weaker debt repayment ability. For instance, Microsoft's debt-to-equity ratio is around 40%, while Google's debt-to-assets ratio is as low as 5.6%.

However, as of the third quarter of this year, MicroStrategy's debt-to-equity ratio has surged to 301%, and last year, due to excessive Bitcoin impairment, it even showed a situation of insolvency.

MicroStrategy Stock Performance

Although MicroStrategy may not be considered a financially robust publicly traded company from a traditional finance perspective, its stock price has skyrocketed recently as Bitcoin's price surged, even surpassing the growth rate of Bitcoin itself.

Since August 2020, when MicroStrategy incorporated Bitcoin into its core business plans, its stock price has risen by 242%, while Bitcoin has only risen by 192% during the same period. This contrasts with the Nasdaq, which increased by only 17%, and tech company Oracle (ORCL), similar to its core business, which rose by 88%.

Buying MicroStrategy Instead of Bitcoin

MicroStrategy believes that holding Bitcoin offers several advantages, making buying MicroStrategy more favorable than buying Bitcoin!

• Easy to buy and sell with a stock account
• No additional fees compared to gas fees for on-chain transactions or management fees for ETFs
• Continuous increase in Bitcoin holdings by utilizing cash flow
• Smart leverage using bond issuance to purchase Bitcoin
• Downside protection supported by MicroStrategy's core business intelligence
• Risk management - Likely referring to Bitcoin's attachment to MicroStrategy, acting as a derivative product!

Bitcoin Leads MicroStrategy to Soar

MicroStrategy entered the Bitcoin market as early as 2020, with its stock price surging to $1,300 during the FOMO bull market. However, during last year's crypto winter, the stock price plummeted to below $140. Now, with Bitcoin's rise, MicroStrategy's stock price has once again surpassed the $500 mark, reaching a market value of $7.39 billion. Calculated at Bitcoin's price of $37,150 before the deadline, its holding of 158,400 Bitcoins is valued at $5.88 billion, accounting for nearly 80% of its market value. Hence, we can interpret that MicroStrategy's stock price is entirely driven by Bitcoin's price surge!

It appears that MicroStrategy's core business should shift to prioritize Bitcoin, with business intelligence as a support. The primary function of business intelligence is to enable MicroStrategy to be a publicly traded company for investors to easily buy and sell. This provides a downside protection during the crypto winter to safely navigate through the cold days, and then lead MicroStrategy's stock price to soar higher and farther during the crypto bull market!