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In a recent note to clients, Bernstein analysts delved into ten critical questions regarding MicroStrategy (NASDAQ: MSTR), emphasizing its distinctive approach centered around Bitcoin and the potential implications for investors.
With an anticipated upside of 49% towards a target price of $600, analysts reaffirmed their Outperform rating on the stock.
Understanding MicroStrategy’s Strategy
1) What is MSTR’s operating model?: MicroStrategy fundamentally operates as a business intelligence software firm but has shifted its identity to resemble a Treasury firm since 2020. The company employs a combination of cash, debt, and equity to acquire Bitcoin, amassing a total of 386,700 BTC, which corresponds to approximately 1.83% of the entire global Bitcoin supply. Bernstein analysts define MSTR’s strategy as an “active leveraged long-only Bitcoin acquisition strategy.”
Assessing Risks and Leverage
2) What risks accompany MSTR’s leverage strategy?: To facilitate its Bitcoin acquisitions, MicroStrategy issues long-term convertible debt while maintaining a controlled leverage ratio of around 30% related to its Bitcoin net asset value (NAV). This approach helps mitigate the likelihood of liquidation during downturns in Bitcoin prices. An instance of this occurred in 2022 when MSTR adeptly lowered its leverage and raised equity to cushion against falling prices.
“When Bitcoin prices rebound and leverage dips below 30%, MSTR seizes the opportunity to issue more convertible debt,” analysts explained.
Understanding Bitcoin Yield
3) What does Saylor mean by Bitcoin yield?: Michael Saylor refers to Bitcoin yield as the annual growth of Bitcoin per diluted share. Since 2020, MSTR’s growth in BTC per share has exhibited a compound annual growth rate (CAGR) of approximately 25%, primarily driven by strategic equity and debt issuance. Analysts emphasize that investors should interpret this as the CAGR in BTC per share, noting that higher Bitcoin prices also lead to an increased NAV per share.
Evaluating MSTR’s Premium
4) How is MSTR’s premium over Bitcoin NAV calculated?: The premium represents the difference between the market value of Bitcoin holdings and their implied value. Currently, MSTR trades at a notable 189% premium over NAV, significantly above its historical average of 61%.
5) What accounts for MSTR’s premium over NAV?: Bernstein attributes this premium to MSTR’s leveraged exposure to Bitcoin, coupled with its proactive management strategy, distinguishing it from passive Bitcoin ETFs. The company efficiently increases its holdings via low-interest, long-term debt and capital raises. “The primary goal of MSTR is to enhance BTC per share, which supports the premium for anticipated growth driven by strategically managed leverage and capital operations,” the analysts stated.
The Market and Funding Strategies
6) Who purchases MSTR’s convertible offerings?: The company’s convertible offerings attract institutional investors and hedge funds seeking the potential for Bitcoin-related gains with mitigated risks. These offerings have notably outperformed the U.S. convertible index this year.
7) When does MSTR plan to liquidate Bitcoin holdings?: MSTR perceives Bitcoin as its ultimate asset, intending to retain these holdings as a form of permanent capital. The company is investigating innovative financing options, such as preference shares, to support its long-term objectives.
Market Trends and Future Plans
8) Are other firms emulating MSTR’s approach?: While some firms, such as Semler Scientific and Marathon Digital Holdings, are adopting Bitcoin-centric strategies, MicroStrategy maintains a unique stance due to its established performance history and operational scale. “MSTR occupies a rare position where it can effectively implement a Bitcoin strategy at scale,” the analysts noted.
9) What is the 21-21 capital raising initiative?: MicroStrategy has set a goal to raise $42 billion by 2027, evenly divided between debt and equity. This initiative is vital for augmenting its Bitcoin holdings in line with favorable market conditions.
10) Why should investors favor MSTR over Bitcoin ETFs?: MSTR offers investors a leveraged Bitcoin exposure coupled with active management and a distinctive strategy. While the company’s stock premium over NAV may vary, it strategically capitalizes on market conditions to issue more equity or convertibles to facilitate additional Bitcoin purchases.
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