There is an old proverb that says, “Those whom the gods seek to destroy first drive them mad.” Bitcoin bears would argue that investors in MicroStrategy (MSTR) stock, which was originally a software company, fall into that category. But why is this so?
Of course, you’ve probably heard about Nvidia and the many other AI stocks that rode the AI boom all year long. But MSTR, which is up nearly 80% over the past month, has outperformed all AI stocks with a 515% year-to-date return this year and 2,682% over the past five years. It won’t start because it’s software related. All of that upside has to do with Bitcoin’s recent craze, and more specifically the FOMO rally following President Trump’s election victory, which is seen as a positive for the cryptocurrency.
Just as the coronavirus outbreak hit, MSTR founder and executive chairman Michael Saylor became a Bitcoin bull, repositioning the company as a so-called “Bitcoin treasury company.” In effect, the company pivoted from being a software company to focusing on accumulating Bitcoin through years of stock and bond issuance. Since then, Michael Saylor doesn’t seem to have much interest in the software business. Last week, its market cap exceeded $100 billion (currently $94 billion). The company’s annual software revenue is approximately $450 million. So investors don’t seem to care about that either. MSTR is about Bitcoin.
Outperforming Bitcoin
Anyway, given the bets on Bitcoin, some may wonder what’s wrong with its rise since Bitcoin is also rising. Now comes the crazy part. Bitcoin is up 157% year-to-date, while MSTR is up 515%. How is it possible that a company that is only an indirect way to buy Bitcoin can outperform Bitcoin so much? Well, as long as investors are willing to buy stocks that way, that is. It’s possible.
Currently, MSTR is trading at a 195% premium to the value of its Bitcoin holdings. In simple terms, this means that you can pay X to buy 1 unit of Bitcoin directly, or you can buy MSTR stock at 2.95x to get indirect ownership of 1 unit of Bitcoin. The justifications for this by Michael Thaler and a few others defy logic, giving explanations that sound like sophisticated finance to the gullible and bizarre to others.
One explanation is how MSTR allows you to buy more Bitcoin and make a profit by using leverage at a low cost. However, that assumes that Bitcoin will continue to rise. What happens if there is a big drop, as has happened many times in the past?
Investors would do well to remember how ETFs leveraging oil futures contracted when oil prices turned negative in March 2020. Anyway, for now, MSTR bears are pointing out how the stock crashed after the dot-com boom.
