Summary
MicroStrategy shares have surged due to its unique strategy of leveraging Bitcoin and issuing debt and equity to grow Bitcoin holdings per share.
The company's 21/21 plan aims to raise $42 billion to buy more Bitcoin, enhancing shareholder value through increased Bitcoin yield.
The net asset value per share is estimated at $111.13 as of 12/31, but shares trade at a premium due to expected high Bitcoin yield growth.
Despite volatility, I believe MicroStrategy is a buy, as its Bitcoin yield strategy promises substantial long-term returns if Bitcoin prices continue to rise.
Bitcoin Concept With Binary Codes
Eoneren
Co-Authored by Noah Cox and Brock Heilig
Investment Thesis
MicroStrategy (NASDAQ:MSTR) shares were one of the top-performing equities here in the US in 2024 with shares up 479.68% over the last 12 months.
At the end of 2024, MicroStrategy was added to the NASDAQ 100 index, representing how the company as both a Bitcoin treasury and software technology firm has reached a new paradigm.
I think the biggest question in front of investors for MicroStrategy is why shares should deserve to trade at a premium. On the surface, the company looks like a closed-end Bitcoin fund that issues a combination of debt and equity securities in order to accumulate Bitcoin. I think this grossly understates what Chairman Michael Saylor’s plans are.
MicroStrategy plans to be far more than just a closed-end Bitcoin fund. As Bitcoin prices move higher, MicroStrategy is able to monetize their access to debt markets in order to split the risk of Bitcoin into a series of ‘tranches’ based on which security investors buy.
In essence, MicroStrategy is looking to give convertible bond investors a risk-adjusted return to invest in Bitcoin with.
For common stockholders, MicroStrategy is aiming to act like a leveraged Bitcoin fund that is trying to grow the amount of Bitcoin per share by a rate of 6-10% per year for the next 3 years.
As MicroStrategy shares move higher (powered by Bitcoin’s rise), this enables management at MicroStrategy to issue new stock in the company at progressively higher prices. The cash proceeds from these stock offerings simultaneously raise the average net asset value per share, providing more benefit to existing shareholders. It’s a weird form of dilution that is actually net beneficial.
As shares become more valuable because they contain more Bitcoin, investors are buying into these shares at a premium above net asset value because they believe that Saylor will be able to increase the amount of Bitcoin through debt offerings and equity offerings.
With this, I am a buy on MicroStrategy. While shares promise to be volatile, I think as Saylor rolls out his strategy, investors will be rewarded with the amount of Bitcoin he can accumulate per share. As Bitcoin itself compounds, shares should continue to do well.
Background
Michael Saylor co-founded MicroStrategy in 1989 alongside co-founders Sanju Bansal and Thomas Spahr. A $250,000 consulting contract from DuPont in 1989 allowed MicroStrategy to kickstart its business.
By 1992, MicroStrategy signed its first major client, McDonald’s, to a $10 million deal.
Saylor, who served as the company’s CEO from its inception in 1989 to 2022 (and now as Chairman), is a major advocate of Bitcoin. As of their 8K filed on January 6th, the company owns 447,470 Bitcoin.
As seen in an earnings presentation from Q3, MicroStrategy’s Bitcoin stockpile has been growing significantly. Keep in mind, this was before their large purchases in Q4 (up to the 447,470 Bitcoin I mentioned before).
Bitcoin Treasury Growth
Bitcoin Treasury Growth (MSTR Earnings Deck)
So, MicroStrategy has clearly been successful in building up its Bitcoin holdings. But what is this all worth? For this, I think we first need to look at what the net asset value is today via balance sheet analysis.
Balance Sheet Analysis
For us to truly understand what MicroStrategy is worth, we need to analyze their balance sheet and assets.
Since MicroStrategy has reported via an 8K their most current Bitcoin holdings, we will use these figures. In the 8K filing, MicroStrategy noted they own 447,470 Bitcoin. Using the valuation provided in the 8K, the Bitcoin treasury company pegs their Bitcoin valuation of $41.789 billion.
MSTR Bitcoin Holdings
MSTR Bitcoin Holdings (MSTR)
Throw in the cash the company had at the end of Q3 of $46.3 million, accounts receivable as of Q3 of $115.1 million, and property, plant and equipment (as of Q3) of $82.8 million and we get total assets of roughly $42.03 billion.
On the liabilities side, the company had current liabilities as of Q3 of $288.1 million, debt liabilities as of December 31st of $10.379 billion (including a small secured loan of $9.8 million), and capital leases of $57.5 million. The company’s total liabilities are roughly $10.72 billion.
I am doing this math to get a rough estimate of what the net asset value for shares is.
The rough net asset value of the company as of 12/31 appears to be $31.31 billion.
On a diluted basis (including convertible notes) the company has 281.735 million implied diluted shares outstanding.
MSTR Capital Structure
MSTR Capital Structure (MSTR 8K)
In essence, this implies an approx. net asset value of $111.13/share as of 12/31.
So, from here, I think the main question is straightforward: why should we pay roughly 2.95x net asset value for Saylor’s company? I think the answer has to do with how MicroStrategy management is monetizing the debt and equity markets.
Issuing Stock Grows Their NAV As Bitcoin Rises
Based on our balance sheet analysis using the fair value of Bitcoin, each share of MicroStrategy has a net asset value of $111.13 per share.
While each share currently has $111.13 in value right now, we have to consider Saylor’s 21/21 monetization plan that he’s looking to get shareholder approval for and then execute on over the next three years.
Yahoo Finance explained in detail what Saylor’s 21/21 monetization plan entails.
...the "21/21 Plan," is to raise $42 billion, then use it to buy more Bitcoin. Half of the funds, or $21 billion, would come from at-the-market offerings of new shares in the company. The other $21 billion would come from new fixed-income offerings, primarily in the form of convertible debt.
While the strategy includes convertible debt, I want to focus for a second on the common stock offerings that, I think, are a key part of this equation.
MicroStrategy wants to increase its common share count (class A) from 330 million shares to 10.33 billion shares (or a 10 billion share increase) through shareholder approval and then common stock offerings.
What this means is that as MicroStrategy proceeds to issue more class A shares, the cash proceeds from each share sale will increase the average net asset value of all shares.
Because, if shares are offered (and purchased) by the public at $300/each, the company receives roughly $300/share in cash that is then available to be used to purchase Bitcoin.
Previously, the company has been successful in issuing shares well above their net asset value. In November, MicroStrategy completed an at-the-market offering of 7.854 million shares of common stock. These shares were sold for well above net asset value at the time based on the amount of Bitcoin that was on their balance sheet and also the going price of shares at the time of the sale.
Given this, we know the market has some appetite to buy shares above net asset value. The reason (I believe) is because as each share is issued, current shareholders know they will see their net asset value grow (hence the ‘Bitcoin Yield’ metric).
While this new offering will cause a lot of dilution of common shares, I think it's safe to assume that this new offering will continue to help enhance Bitcoin yield. I expect Bitcoin per share to continue to grow. If we look at the company’s Q3 earnings call, their goal was 6-10% per year in Bitcoin Yield.
However, since the election with the run-up in the price of Bitcoin, their Bitcoin yield in Q4 alone was a strong 48.0% according to their 8K.
This yield is key. The company’s projected Bitcoin yield helps us determine what net asset value premium the company should be trading at.
Valuation
Currently, shares trade at roughly 2.95 times their net asset value. In order for us to figure out what tangible book value ratio the shares should trade at, we should think about the expected CAGR of Bitcoin over the next 10 years.
Over the last 14 years, Bitcoin has had a CAGR of 142%. Saylor, in his Q3 earnings call, believes Bitcoin is now compounding at roughly 50% per year.
We are built on an asset, bitcoin, which is growing 50% a year and we are growing with that asset.
So basically, if we take the company’s projected Bitcoin yield growth per year, and multiply it by the growth in the price of Bitcoin per year, we should arrive at the growth rate of the net asset value of the company per year.
Saylor mentioned earlier in his call he was targeting 6-10% per year in Bitcoin yield. Over the course of 10 years, growing an asset at 50% per year vs. growing an asset at 60% per year results in the 60% CAGR asset reaching 190.67% of the value of the 50% CAGR asset.
In essence, the market is applying this 2.95x multiple on net asset value because it expects Saylor and the management team at MicroStrategy to grow their Bitcoin per share at a rate that gives shareholders a return 2.95x greater than Bitcoin over the next 10 years. The way you do this is to give each shareholder 2.95x more Bitcoin per share over the next 10 years.
Using this math, in order to get this level of growth, investors are implying a CAGR Bitcoin yield of roughly 11.42%. This is only slightly higher than Saylor’s conservative 6-10% Bitcoin yield growth estimates.
Again, keep in mind that the company’s Bitcoin yield in Q4 alone was 48%.
In essence, this is why you pay a premium for MicroStrategy shares over buying Bitcoin directly. You are betting that Saylor can grow your Bitcoin per share at a rate greater than 11.42% annually.
I personally think he can as well. I think his 6-10% target is conservative and the company (especially with the 21/21 plan) can grow its Bitcoin per shareholder at 15% per year for the next 10 years. As I mentioned above, share offerings accelerate Bitcoin yield. That is what we saw in Q4. That is what I think we will see again.
If we saw the company generate a Bitcoin yield of 15% per year for the next 10 years, each shareholder would have 4.05x more Bitcoin per share than they do right now.
In essence, net asset value would grow by 4.05x over the next 10 years. Compared to the 2.95x net asset value premium on shares, this means shares have roughly 37% upside from here (if they were to converge on this net asset value premium that represents what I think the company can generate in Bitcoin yield).
Risks
I think the biggest risk for MicroStrategy is that their 21/21 plan does not get approved. MicroStrategy’s goal is to become a Bitcoin treasury company.
Because their goal is to become a Bitcoin treasury company, they are highly dependent on debt and equity offerings in order to fund the purchase of additional Bitcoin. Currently, the company is bumping up near their class A share count limit.
In essence, in order for the company to continue to grow their Bitcoin yield, the firm has to raise their Class A and Class B share count limits.
However, if we look at data from Polymarket, we can see that Polymarket is currently pricing in a greater than 95% chance that shareholders will approve this 21/21 offering. This makes me optimistic. From here, the 21/21 plan (because it is so dilutive) should allow the company to hit this 15% target Bitcoin yield that I mentioned before.
Bottom Line
While MicroStrategy shares have experienced an incredible run-up over the past year, I think it’s key to dive in and understand why investors are paying a net asset value premium for shares. The answer is this Bitcoin yield that I mentioned above.
Saylor’s plan to buy more Bitcoin via the 21/21 offering plan should allow investors to see their Bitcoin yield compound at a rate faster than the 6-10% Saylor thinks the company can hit over the next 3 years. The faster this Bitcoin yield compounds, the faster shares could move up.
Really, what Saylor is doing is raising money for an investment that he believes will compound at 50% YoY on a CAGR basis. This is no different than any company raising money for cash flowing assets that compound value at 50% year over year. While some investors may be concerned about Saylor’s leverage through these convertible notes, it's important to note that just $9.8 million of the $10.379 billion in debt liabilities are secured. This means that MicroStrategy does not face an effective ‘margin call’ if their debt to equity ratio becomes concerning for some investors.
With this, while shares are incredibly volatile (and risky) I think they are a buy. As long as the price of Bitcoin continues to move higher over time (which I believe it will over most 5, 10 year horizons) MicroStrategy should be able to benefit as well.
