Why is Michael Saylor buying more Bitcoin? His latest efforts may actually benefit shareholders
When this writer first read that MicroStrategy founder Michael Saylor plans to sell $500 million in stock to increase his Bitcoin holdings, I thought it was another half-assed bet from the flagship cryptocurrency world’s leading crusader and true believer.
After all, Saylor has already spent nearly $4 billion to amass nearly 130,000 coins that are now worth a third less than he paid (read the full story of Saylor’s Bitcoin odyssey here). The gamble went so wrong that Bitcoin’s falling price in Q2 stuck MicroStrategy with a loss of $918 million. Amid the wreckage, Saylor stepped down as CEO to become executive chairman of the corporate software player whose voting shares he closely controls. Between the disastrous earnings release and the filing of the offer, Saylor made more headlines in late August when Washington, DC’s attorney general unveiled a lawsuit accusing the flamboyant promoter of avoiding $25 million in county taxes by falsely claiming he lives in Florida.
Then I thought again. What if MicroStrategy’s stock is so overvalued that it’s less inflated than battered Bitcoin? If so, might Saylor be smart to issue new shares now, while he can sell them well above fundamental value, and park the proceeds in what at least in some camps is seen as a “hard asset?” He would use a super rich currency to buy what is supposed to be a lasting store of value. Then, while MicroStrategy shareholders would still suffer greatly, they would suffer less than if Saylor had not sold the shares to buy more Bitcoin, assuming the coins simply retained their current value.
The whole strategy seems outrageous. Bitcoin has proven the most volatile major asset class in history, and anything but a gold-like refuge for troubled times. But if you combine the high probability that MicroStrategy is facing a deep dive, and that Bitcoin has fallen this far, it could at least stabilize or even rise, to be sure, a crazy, practically surreal mix of factors , then the Saylor gambit might make some kind of economic sense. Not as much sense as selling all your Bitcoins tomorrow, collecting money on a rainy day and scrambling to revive a previously slow-growing but quite profitable software company. But maybe not as daff as it looks.
Saylor floated overpriced stock before
In fact, this isn’t the first time Saylor’s marshalled high-flying stocks have bought Bitcoin. From the time he started buying coins in August 2020 to June 2021, his stock jumped from below $150 per share to around $700, following the explosion in Bitcoin. Saylor saw a great opportunity, and jumped at it. Over the next few months, he sold $1 billion in shares at average prices above $700. As a result, an offer that would have diluted his shareholders by 66% before Bitcoin reduced their earnings per share by only 12%. As one short seller told me, “Saylor would have been much better off using inflated stocks to buy all the Bitcoin than borrowing the $2.4 billion he has to pay back.”
Here’s how the deal could actually dampen what looks like an inevitable drop in MicroStrategy’s stock. The only thing that would prevent a major drop is a jump in Bitcoin’s price, and the recent trend is anything but favorable. First, let’s examine MicroStrategy’s basics. As of mid-day on September 13, its Bitcoin warchest has a market capitalization of $2.63 billion, at an average price of $20,300 per coin. That’s just $230 million more than the $2.4 billion in balance sheet debt securing the coins. What is the software business worth? It hasn’t grown in years, had pretax income of just $19 million in 2021, and barely broke even in the first six months of 2022. (We’ll use pretax instead of net income since MicroStrategy has achieved gigantic tax loss carryforwards that should wipe out taxes for years to come.) But let’s assume the best case. Since 2016, pre-tax profits have averaged $52 million annually.
Once again, MicroStrategy has shown no ability to increase sales or profits. So we apply a zero-growth multiple of 15 to these earnings. Therefore, the software side of the business is worth something like $780 million. (That’s 15 x $52 million.) Add the net worth of Bitcoin ($230 million) to the earning power of the software business, and based on the fundamentals, MicroStrategy looks to deserve a market cap of roughly $1 billion. The rub: MicroStrategy’s is selling at a valuation of $2.66 billion, nearly 2.7 times that amount.
Today, the outstanding share is 11.3 million. A year from now, for example, if MicroStrategy pulls back to a fundamental value that includes Bitcoin still hovering at current levels of $20,300 or so, each share will be worth $88 ($1 billion market cap divided by 11.3 million shares) . It is as if Saylor never proposed the new offer and did not sell any additional shares.
At first glance, Saylor’s plan looks like a disaster. He would float a boatload of 2.1 million new shares. The sales, led by Cowen & Co., would take place over weeks and months. But to simplify, let’s assume that on average he collects the September 13 price of $235. That’s a significant dilution of 18.6%, bringing the total number of shares to 13.4 million. But remember that he is using inflated stock to buy something that may be less inflated. Consider that in mid-2023, the software business is still worth $780 million, and Bitcoin’s price is the same. MicroStrategy would own $500 million more Bitcoin, for a total of $3.16 billion, or $760 million more than $2.4 billion in debt. All told, MicroStrategy’s cap will be $760 million in Bitcoin plus $780 on the software side for a total of $1.54 billion. It would sell for $115 a share, almost a third more than if Saylor didn’t buy the coins! (That’s the market cap of $1.54 billion over 13.4 million shares.)
Clearly, MicroStrategy investors will still be dismayed by a drop from $235 to $115, or by just over half. But that’s still a lot better than a drop from $235 to $88, the two-thirds hit that would happen if he didn’t take advantage of the massive overvaluation to get his hands on the extra Bitcoin.
Once again, this whole head-spinning exercise only works if Bitcoin’s price at least stays at current levels. But it doesn’t have to rise for Saylor’s scheme to follow a certain logic. Ultimately, this confusing maneuver, if it works, will only soften what is destined to be a hard landing for MicroStrategy – unless, of course, Bitcoin soars again. Of course, Saylor is doubling down because he thinks it will happen. Barring the Bitcoin miracle he has long and wrongly predicted, MicroStrategy shareholders will pay dearly for Michael Saylor’s zeal.
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