Why is Michael Saylor buying more Bitcoins? His latest bet could actually benefit shareholders

When this writer first read that MicroStrategy founder Michael Saylor plans to sell $ 500 million in stock to increase his Bitcoin stash, I thought it was another semi-crazy bet from the leading crusader and true believer. of the world of flagship cryptocurrencies.

After all, Saylor has already spent nearly $ 4 billion to amass nearly 130,000 coins that are now worth a third less than what he paid (read the full story of Saylor’s Bitcoin Odyssey here). The bet went so badly that in the second quarter Bitcoin’s cascading price blocked MicroStrategy with a loss of $ 918 million. Amid the rubble, Saylor stepped down as CEO to become executive chairman of the enterprise software player whose voting shares he closely controls. Between the disastrous earnings release and the submission of the offer, Saylor made more headlines in late August when the Washington, DC Attorney General unveiled a lawsuit accusing the flamboyant promoter of evading $ 25 million in district taxes by falsely claiming to live in Florida.

Then I rethought. What if MicroStrategy’s shares are so overvalued that they are less inflated than battered Bitcoin? If so, Saylor might be smart about issuing new shares now, while he can sell them far above fundamental and park the proceeds in something that is seen, at least in some fields, as a “valuable asset?” It would use super-rich currency to buy what should be a durable store of value. So while MicroStrategy shareholders would still suffer greatly, they would suffer less than if Saylor hadn’t sold the stock to buy more Bitcoin, provided the coins simply held today’s value.

The whole strategy looks outrageous. Bitcoin has proven to be the most volatile major asset class in history and far from a gold-like refuge for troubled times. But if you combine that high probability that MicroStrategy is facing a deep dive, and that Bitcoin has dropped so much that it can at least stabilize or even rise, to be sure a bizarre and practically surreal combination of factors, then Saylor’s move could create. some sort of financial sense. He doesn’t make as much sense as selling all of his Bitcoins tomorrow, raising some cash on a rainy day, and striving to revive a previously slow-growing but quite profitable software firm. But maybe he’s not as stupid as he seems.

Saylor floated overpriced stocks earlier

In fact, this isn’t the first time Saylor has organized high-flying shares to buy Bitcoin. From the time he started buying coins in August 2020 to June 2021, his stock jumped from under $ 150 per share to around $ 700, following the Bitcoin explosion. Saylor saw a great opportunity and launched himself. In the following months, it sold $ 1 billion in stock at average prices of over $ 700. As a result, an offer that would dilute its shareholders by 66% before Bitcoin lowered their earnings per share by just 12%. As one short seller told me, “Saylor would have been far better off using inflated stocks to buy all of his Bitcoins than to borrow the $ 2.4 billion he will have to repay.”

Here’s how the deal could actually cushion what appears to be an inevitable decline in MicroStrategy’s stock. The only thing that would prevent a sharp drop is a jump in Bitcoin’s price, and the recent trend is far from favorable. First, let’s look at the fundamentals of MicroStrategy. As of mid-day on September 13, its warchest Bitcoin has a market value 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 budget debt that the coins insure. How much is the software business worth? It hasn’t grown over the years and posted a pre-tax profit of just $ 19 million in 2021, and in the first six months of 2022 it just broke even. (We will be using pre-tax profit rather than net profit since MicroStrategy has reaped gigantic tax losses that should wipe out withdrawals for years to come.) But let’s assume the best case. Since 2016, pre-tax profits have averaged $ 52 million annually.

Again, MicroStrategy showed no ability to expand sales or profits. So we’re going to apply a zero-growth multiple of 15 to those earnings. So, the software side of the company 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 basics, MicroStrategy appears to deserve a market cap of around $ 1 billion. . The problem: MicroStrategy’s sells at a valuation of $ 2.66 billion, nearly 2.7 times that amount.

Today, its outstanding share is 11.3 million. In a year, let’s say, if MicroStrategy retreats to a fundamental value that includes Bitcoin still hovering at today’s level of around $ 20,300, each share would be worth $ 88 ($ 1 billion market cap divided by 11.3 million shares). . It is as if Saylor had never proposed the new offer and had not sold any additional shares.

At first glance, Saylor’s project looks like a disaster. It would float a cargo of 2.1 million new shares. Sales, led by Cowen & Co., would take place over weeks and months. But to keep it simple, let’s assume it raises, on average, the September 13 price of $ 235. That’s a substantial 18.6% dilution, bringing the total stock count to 13.4 million. But keep in mind that it 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 the price of Bitcoin is the same. MicroStrategy would own $ 500 million more in Bitcoin, for a total of $ 3.16 billion, or $ 760 million more than the $ 2.4 billion in debt. All in all, MicroStrategy’s limit would be $ 760 million in Bitcoin plus $ 780 on the software side for a total of $ 1.54 billion. It would sell for $ 115 per share, almost a third more than if Saylor hadn’t bought the coins! (This is the market cap of $ 1.54 billion on 13.4 million shares.)

Obviously, MicroStrategy investors will be dismayed at a drop from $ 235 to $ 115, or just over half. But it’s still much better than a drop from $ 235 to $ 88, two-thirds that would occur if it didn’t take advantage of the huge overvaluation to grab the extra Bitcoin.

Again, this mind-boggling exercise only works if Bitcoin’s price remains at least at today’s levels. But Saylor’s plan doesn’t need to follow a certain logic. Ultimately, though, this delusional ploy, if it works, would only mitigate what is bound to be a hard landing for MicroStrategy, unless, of course, Bitcoin flies again. Of course, Saylor is doubling down because he thinks it will happen. Aside from the Bitcoin miracle he has long and wrongly predicted, MicroStrategy shareholders will pay a lot for Michael Saylor’s fanaticism gone wrong.

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