When this writer first read that MicroStrategy founder Michael Saylor plans to sell $500 million in stock to swell his Bitcoin stash, I thought it was another half-crazed bet from the flagship cryptocurrency worlds leading crusader and true-believer.
After all, Saylors already spent nearly $4 billion to amass almost 130,000 coins that are now worth one-third less than he paid (read the full tale of Saylors Bitcoin odyssey here). The gamble went so wrong that in Q2, Bitcoins cascading price stuck MicroStrategy with a $918 million loss. Amid the wreckage, Saylor stepped down as CEO to become executive chairman of the enterprise software player whose voting shares he tightly controls. Between the disastrous earnings release and the filing for the offering, Saylor made more headlines at the close of August when the Washington, DC attorney general unveiled a lawsuit that charged the flamboyant promoter with evading $25 million in District taxes by falsely claiming he lives in Florida.
Then I thought again. What if MicroStrategys stock is so over-valued that its less inflated than battered Bitcoin? In that case, Saylor might conceivably be smart to issue new shares now, while he can sell them far above fundamental value, and park the proceeds in something thats seen, at least in some camps, as a hard asset? Hed be using a super-rich currency to buy whats supposed to be a durable store of value. Then, though MicroStrategy shareholders would still suffer big time, theyd suffer less than if Saylor hadnt sold the shares to buy more Bitcoin, providing the coins simply keep todays value.
The whole strategy seems outrageous. Bitcoins proven the most volatile major asset class in history, and anything but a gold-like refuge for hard times. But if you combine that high probability that MicroStrategys facing a deep dive, and the chance that Bitcoins dropped so far it might at least stabilize or even rise, to be sure a zany, practically surreal blend of factors, then the Saylor gambit could make some sort of financial sense. Not as much sense as selling all his Bitcoin tomorrow, collecting some rainy day cash, and striving to revive a formerly slow-growth but fairly profitable software enterprise. But maybe not as daffy as it looks.
In fact, this isnt the first time Saylors marshaled high-flying stock to buy Bitcoin. From the time he started purchasing coins in August of 2020 to June of 2021, his stock jumped from below $150 a share to around $700, tracking the explosion in Bitcoin. Saylor saw a big opportunity, and pounced. Over the next several months, he sold $1 billion in stock at average prices of over $700. As a result, an offering that would have diluted his shareholders by 66% pre-Bitcoin lowered their earnings-per-share only 12%. Says Ryan Ballentine, co-founder of Bireme Capital, a money manager thats shorting MicroStrategy shares, Saylor would have been much better off using inflated stock to buy all his Bitcoin than borrowing $2.4 billion hell have to repay.
Heres how the deal could actually cushion what looks like an inevitable fall in MicroStrategys stock. The only thing that would prevent a big drop is a jump in Bitcoins price, and the recent trend is anything but favorable. First, lets examine MicroStrategys fundamentals. As of mid-day on September 13, its Bitcoin warchest has a market value of $2.63 billion, at an average price of $20,300 per coin. Thats just $230 million more than the $2.4 billion in balance sheet debt securing the coins. Whats the software business worth? It hasnt grown in years, and posted pre-tax earnings of only $19 million in 2021, and it barely broke even in the first six months of 2022. (Well use pre-tax rather than net income since MicroStrategy has garnered giant tax loss carry forwards that should wipe out levies for years to come.) But lets assume best case. Since 2016, its before-tax profits from the software franchise have averaged $52 million annually. Forecasting a similar number is highly optimistic since MicroStrategy had minimal debt pre-COVID, and the almost $50 million in annual interest on the $2.4 billion borrowed to buy Bitcoin is now erasing most of the operating income from software sales and services.
Once again, MicroStrategys shown no ability to expand sales or profits from software. So well apply a zero-growth multiple of 15 to those possible earnings. Hence, the software side of the business is worth something like $780 million, at best. (Thats 15 x $52 million.) Add the net value of the Bitcoin ($230 million) to the earnings-power of software, and based on basics, MicroStrategy appears to merit a market cap of approximately $1 billion, in the most upbeat of estimates. The rub: MicroStrategys is selling at a valuation of $2.66 billion, nearly 2.7 times that number.
Today, its outstanding share count is 11.3 million. A year from now, say, if MicroStrategy retreats to a fundamental value that includes Bitcoin still hovering at todays level of $20,300 or so, each share would be worth $88 ($1 billion market cap divided by 11.3 million shares). Thats as if Saylor never proposed the new offering and didnt sell any additional shares.
At first glance, Saylors blueprint looks like a disaster. Hed be floating a boatload of 2.1 million new shares. The sales, headed by Cowen & Co., would happen over weeks and months. But to simplify, well assume he collects, on average, the September 13 price of $235. Thats substantial dilution of 18.6%, lifting the total share count to 13.4 million. But keep in mind hes using inflated stock to buy something that might be less inflated. Consider that in mid-2023, the software business is still worth $780 million, and Bitcoins price is the same. MicroStrategy would own $500 million more Bitcoin, for a total of $3.16 billion, or $760 million more than the $2.4 billion in debt. All told, MicroStrategys cap would be that $760 million in Bitcoin plus the $780 on the software side for a total of $1.54 billion. It would be selling at $115 a share, almost one-third more than if Saylor didnt buy the coins! (Thats the $1.54 billion market cap over 13.4 million shares.)
Obviously, MicroStrategy investors will still be dismayed at a drop from $235 to $115, or by just over half. But its still a lot better than a descent from $235 to $88, the two-thirds hit that would happen if he didnt capitalize on the huge over-valuation to grab the extra Bitcoin.
Once again, this whole head-spinning exercise only works if Bitcoins price at least stays at todays levels. But it doesnt have to rise for Saylors scheme to follow a certain logic. In the end though, this delirious maneuver, if it works, would only soften whats destined to be a hard landing for MicroStrategyunless, of course, Bitcoin soars again. Naturally, Saylors doubling down because he thinks that will happen. Barring the Bitcoin miracle hes long and wrongly predicted, MicroStrategy shareholders will pay sorely for Michael Saylors zealotry-gone-wrong.
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