MicroStrategy: Between Bitcoin Hype and Valuation Trap

MicroStrategy's stock has demonstrated an impressive performance so far this year, with a rise of over 300% since the beginning of the year and a remarkable 1,710% since the start of this decade. This dynamic growth prompted the board to announce a 10-for-1 stock split in July, which became effective after the close of trading on August 7. Although MicroStrategy’s core business has been based on enterprise analytics software for decades, and the company has attempted to jump on the AI bandwagon with this division, its market capitalization of just under $52 billion has little to do with AI or software. Instead, Bitcoin has long been the real driver behind MicroStrategy's stock surge. Bitcoin, the largest digital currency by market value, has enjoyed advantages for more than a decade as a pioneer among cryptocurrencies. Its perceived scarcity feature—only 21 million bitcoins will ever be mined—attracts investors. MicroStrategy has established itself as the largest corporate holder of Bitcoin, holding 252,220 bitcoins at an average price of $39,266 per token, according to an 8-K report by the US Securities and Exchange Commission (SEC) dated September 20. In total, MicroStrategy has invested $9.9 billion to acquire 1.2% of the possible bitcoins. The Bitcoin price was recently $72,481 per unit, which is close to its all-time high. This represents an 85% appreciation of MicroStrategy’s Bitcoin portfolio compared to the acquisition costs, understandably thrilling shareholders. However, looking beyond the successful start of the year, there are also reasons for concerns that MicroStrategy’s stock could drop by 50% or more over the next 12 months. The most obvious concern is the unwarranted premium being paid for the Bitcoin holdings. The valuation concept at MicroStrategy seems like a crack in the foundation: at a Bitcoin price of $72,481, all of MicroStrategy’s bitcoins would be worth $18.28 billion, whereas the current market capitalization is over $51.7 billion. The significant discrepancy between the true valuation and market price could prove problematic. Additionally, MicroStrategy finances its aggressive Bitcoin purchases through convertible bonds, causing the company's debt to swell to $4.274 billion. This results in an annual interest burden of $34.6 million—a challenge given the low capital returns. Ultimately, MicroStrategy's software business is in decline: annual revenues have dropped by 14.4% over the past ten years, dampening the potential for future interest payments. Adding to this is the risk that Bitcoin’s first-mover advantages might be challenged by faster and cheaper blockchain technologies. In summary, MicroStrategy strongly resembles a digital bubble, the bursting of which could cause the stock to drop significantly.