Is Microstrategy overpriced?

Microstrategy is up >1,400% since they adopted a Bitcoin strategy in August 2020, they've grown from $600 Million to $45 Billion in 4 years (read that again). It's worth mentioning that in that time, through a creative mix of debt, convertible debt etc, MSTR's shareholder's "sats per share" has increased.

MSTR usually trades close to Bitcoin but recently the stock has been on an absolute tear crushing everyone, including Bitcoin.

Today the share price of MSTR reflects a premium on its BTC position —if you bought MSTR as a pure BTC proxy you'd be paying more per BTC than if you bought spot BTC.

The simple position around this is: "If MSTR owns X amount of BTC, why would you pay 3.8X for the company, you'd be better off buying the ETF."

This has led to a lot of hemming-and-hawing about whether such a price can be justified with many commentators discussing MSTR's NAV (Net Asset Value) — calculated by taking a company's assets and subtracting its liabilities.

As the tweet below shows, the NAV premium is not outrageous compared with other players in the space:

• Microstrategy NAV: 3.8x
• MarathonNAV: 6.9x
• Coinbase NAV: 39.8x
• Block NAV: 100.2x
• Tesla NAV: 1,419.4x

Someone in the comments (fairly) points out:

These examples are not analogous because the value of the base business in each case needs to also be taken into consideration. The proportion of Bitcoin held value to base business value influences the NAV premium.
—3xWolverine

Right, it makes sense for Tesla to have a higher NAV than, say Marathon (BTC miners) because they may deliver a market re-defining product like robots or autonomous taxis, so the company is potentially worth much more than just the value of their assets.

But, I think Mr. 3xWolverine is missing an important point. MSTR seems to be sitting in a unique "goldilocks" position:

• It's got an underlying business that could be called stagnant, but produces steady, positive cashflow.
• Saylor's leadership allowed them to go "all in" on BTC and re-invent the business as a "pure BTC play" which would be hard for other businesses to replicate.
• They are small enough that their large, levered-BTC position gives their (previously very stable) stock high "enhanced" volatility —attractive to funds whose activities depend on volatility. Large companies may not be able to achieve (or want) this high volatility.
• They are big (and liquid) enough to have broad access to capital markets (which would be hard to replicate quickly by a smaller entrant) and have been very creative in the ways they've securitized BTC, catering to different risk appetites.
• Their first-mover advantage means that any other company trying to replicate their playbook will be generating upward price-pressure for BTC and strengthening MSTR's balance sheet, which makes it easier for them to borrow even more to buy BTC

Saylor gave a dense, 1-hr "Bitcoin Crash Course" to equity research firm Bernstein and the takeaways are below:

From his presentation:

…of course, we’ve outperformed Bitcoin because what's the only thing better than Bitcoin? It would be borrowing money at 0% interest and buying Bitcoin with it, or issuing equity at a 60% premium—or 100% premium—to underlying Bitcoin and then buying Bitcoin back with it. We're just arbitraging the difference between certain fiat capital markets and the digital capital market. —Michael Saylor

In short, I don't have an opinion about what the "right" NAV value is for MSTR or any interest in telling you what a "good" price entry point is.

But I do believe they've carved out a special and hard-to-replicate niche for themselves straddling the equity, debt, and convertible debt, options and derivatives markets, and eventually that will be extended to include the fixed-income markets while building a massive capital base at the same time.

Microstrategy has used intelligent leverage to create the first "Bitcoin refinery" and are on their way to creating the world's first and biggest "Bitcoin Bank". If you're not sure what those terms mean that's good news because Saylor does and you still have the chance to hop in before others figure it out.

By creatively and aggressively securitizing BTC as an asset class, they are transforming the capital markets in ways that few understand yet and even fewer can aspire to emulate. The market doesn't know how to value MSTR, there has never been a company like it. It's obviously not without risks but my guess is 10 years from now, it will be insanely more valuable.

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