MicroStrategy’s Bitcoin king just saw his gems fall to a grim new milestone

It’s no wonder the flamboyant promoter talks his book. He is risking the soundness of his enterprise software on Bitcoin’s future price (you can read the full story of Saylor’s Bitcoin saga here). And on October 13, the financial standing of his Bitcoin holdings reached a milestone that underscored the ruthlessness of his efforts.

By mid-morning that day, Bitcoin’s price fell to $18,300, near its lowest level in two years. Saylor has amassed 130,000 Bitcoin on his balance sheet for a total cost of just over $3.406 billion. He financed the purchases with a stock offering of $1 billion, and four debt agreements, a single margin loan and three bond issues. The sword hanging over MicroStrategy is the debt part: It owes $2.405 billion on the four financings. That’s $18,500 for each of the 130,000 coins in his warchest. When Bitcoin fell below that figure on October 13 to $18,300, Saylor’s trove was worth less than the debt he is obligated to repay by $26 million. Because Saylor bought the coins for $1 billion or 30% more than they are worth now, the money from the stock sale went to waste, diluting his shareholders by 12% and getting them in exchange.

In those days, Bitcoin recovered more or less in step with a tech stock rally, reaching around $19,400 by mid-day on October 18. The gain put the value of the Bitcoin collection at a slim $117 million or 5% more than the debt accumulated from the purchases.

But with Bitcoin trove hovering around the amount MicroStrategy owes, it has no margin of safety. The debt begins to mature in 17 months, and by December 2025, Saylor will have to pay back $855 million, and as much as a whopping $2.4 billion by early 2027. If Bitcoin’s price falls, just by selling an extremely large portion of the coins his, Saylor can repay the previously maturing debt, and will not have enough left to cover what matures in early 2027. By massively leveraging a company that pre-Bitcoin had little debt, Saylor is jeopardizing its existence.

The software industry makes almost no money

Before Saylor’s Bitcoin adventure, MicroStrategy was moderately profitable, generating over $70 million in free cash flow in its good years. But shifting focus to Bitcoin not only makes the company’s finances far more fragile, it has apparently been a downer for the underlying software business. For the first six months of 2022, MicroStrategy generated just $21 million in free cash flow, or $42 million on an annualized basis. A big reason the number is so low: the $46 million annual interest expense that MicroStrategy pays on its Bitcoin loans. In addition, from January to December, it issued a whopping $30 million in equity grants, but did not use money to buy back stock to neutralize the looming dilution, suggesting it is paying employees by diluting shareholders rather than use cash flows from the software business.

The miracle: Although, depending on the day, MicroStrategy’s Bitcoin is worth a little more or less than its debt, it still has an impressive market cap of $2.5 billion. Since the value of Bitcoin minus the debt is roughly zero, investors are putting a $2.6 billion valuation on the software franchise. It is a multiple of 60 times the annual free cash flow, not including the burden from large equity grants. And MicroStrategy is radically riskier than its competitors because bad times for history’s most volatile major asset can sink it.

You have to give Michael Saylor credit. His outrageous, Professor Henry Hill-like sales acumen commands a huge premium for his stock above anything you can get from examining MicroStrategy’s numbers. But in the long run, it’s the numbers that will count. And the two that should scare investors are the wildly fluctuating price of Bitcoin, and the fixed object of $2.4 billion in debt.

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