MicroStrategy is targeted by short-selling firm Kerrisdale Capital, leading to an 11% drop in its stock price.

Short-selling investment firm Kerrisdale Capital has released a research report stating that MicroStrategy, MSTR stock is significantly overvalued compared to Bitcoin, and has announced that they are going long on Bitcoin while shorting MicroStrategy's stock. MicroStrategy plummeted 11% yesterday, falling from a high of nearly $2,000 to $1,704.

MicroStrategy Stock Price Significantly Overvalued Compared to Bitcoin

Kerrisdale Capital stated in a report that MicroStrategy serves as a proxy for Bitcoin, but its trading price carries an unreasonable premium compared to the digital asset BTC that underpins its value.

MicroStrategy positions itself as a Bitcoin development company. Its stable but lackluster software analytics business accounts for only 3% of the company's enterprise value. The rest of the value is driven by its holdings of Bitcoin, which are primarily acquired through debt financing, convertible notes, and stock issuance. While MicroStrategy has successfully increased its Bitcoin holdings, the significant dilution of shares in recent years has kept the per-share Bitcoin amount nearly unchanged.

Bitcoin Takes Flight! What is MicroStrategy's Bitcoin strategy exactly?

Kerrisdale Capital listed various financial indicators in the report, with MicroStrategy's stock price at $1,919 and a market capitalization of $38.1 billion. Its software business accounts for only 3%, suggesting that the other 97% is supported by the Bitcoin price. Based on this calculation, the implied price per Bitcoin held is $177,076, more than double the market price of Bitcoin.

The Rare Bitcoin Era of MicroStrategy Has Ended

The era where MicroStrategy stock represented a rare and unique way to acquire Bitcoin has long passed. Bitcoin can now be easily obtained through brokers, cryptocurrency exchanges, and recently low-cost ETPs and ETFs. Offerings like BlackRock's IBIT, Fidelity's FBTC, and other tools provide liquidity and trading convenience, with the number of such tools continuously increasing. While these developments are positive for Bitcoin, they pose a long-term threat to MicroStrategy's scarcity value and bloated net asset value.

The report calculated that MicroStrategy's premium over Bitcoin is as high as 2.6 times. Since the beginning of 2021, 94% of trading days have seen a premium of 2 times or less. The historical average is 1.3 times. Assuming the premium over net asset value returns to a more consistent historical average, it would represent a 50% return. Therefore, Kerrisdale Capital announced that it is arbitraging by going long on Bitcoin and shorting MicroStrategy's stock.

Traditional Finance Has Long Been Shorting MicroStrategy

There have always been investors in the market who are bearish on MicroStrategy. According to Nasdaq's disclosed Short Interest as of 3/15, there are 3.26 million shares shorting MicroStrategy, accounting for 22% of its total outstanding shares. Looking at data over the past year, the lowest short ratio was 18%, indicating that traditional finance may not appreciate MicroStrategy's unconventional approach of using Bitcoin as a revenue-generating mechanism.

Following the release of Kerrisdale Capital's report yesterday, MicroStrategy plunged by 11% from its recent high of $2,000.

There are many investment research companies in the U.S. focused on short-selling. Previously, Jack Dorsey's payment platform Block under Hindenburg's short attack, claiming that Block's magic was not innovation but fraud, is a classic case.

Block under Hindenburg's short attack, Block's magic not innovation but fraud