Is MicroStrategy Still a Leveraged Bitcoin Play?

Thematic investing relies on exposure to long-term trends. However, many thematic indices and funds contain stocks that do not align with their stated objectives.

Seasoned emerging markets (EM) investor Kevin T Carter made this point on OPTO Sessions when explaining the drawbacks of the MSCI Emerging Markets Index, which, he says, selects companies based on the location of their headquarters. However, “When you’re investing in EM consumer technology, you don’t care about where the company is. You care about where the revenue is coming from.”

In other words, to gain exposure to a trend (such as EM consumer technology), it’s important to clearly identify a company’s, fund’s, or index’s source of revenue. In this OPTO series, we examine stocks that offer the purest exposure to key themes through a detailed assessment of their revenue streams.

MicroStrategy [MSTR] is an interesting example of a stock that bucks the pure play trend. While it derives very little revenue from bitcoin, the cryptocurrency accounts for most of the company’s shareholder equity.

Saylor’s Strategy

MicroStrategy is a software house that develops business intelligence products for enterprises.

It was a relatively obscure stock with a market cap of approximately $1.2bn until August 2020, when its CEO Michael Saylor announced plans to start spending its excess cash reserves on bitcoin as part of the company’s capital allocation scheme, making MicroStrategy the first publicly traded company to announce a cryptocurrency strategy of this kind.

The upshot has been a significant increase in interest in MicroStrategy’s stock, which suddenly offered an avenue for investors that wanted exposure to bitcoin’s price movements without directly owning bitcoin themselves.

MicroStrategy effectively turned itself into a treasury for bitcoin by filling its balance sheet with the digital asset, and its stock soared as a result. As of 15 February, MicroStrategy’s market cap is nearly $13bn, up 982% from August 2020.

Saylor has consistently maintained the strategy; in the final month of 2023, MicroStrategy acquired 14,620 bitcoin for $616m.

This approach has made MicroStrategy a darling for crypto advocates. It is the largest holding in the Amplify Transformational Data Sharing ETF [BLOK], accounting for 6% of the fund’s assets.

Because it uses debt financing and share sales to pay for its bitcoin stores, MicroStrategy is more than just a proxy for bitcoin price movements. It acts as a leveraged play on the cryptocurrency with no added fees, Saylor told Bloomberg TV in December. As such, its price movements can be more volatile than those of bitcoin itself.

Revenue or Equity?

However, despite gains in the market value of bitcoin during the period it has been acquiring it, MicroStrategy has been writing down the value of its bitcoin assets.

Accounting rules in the US state that an intangible asset is considered impaired if, at any point during a reporting period, its value drops below its purchase price. Its ‘carrying value’ must then be permanently written down to the lowest value that it reached during that reporting period, and the company must recognise a corresponding loss.

MicroStrategy buys bitcoin every quarter, but given the asset’s volatility, it will frequently dip below the purchase price later on. So — highly counter-intuitively — MicroStrategy has technically made $2.3bn of impairment losses on bitcoin assets it had bought for $5.9bn, and which as of 31 December were valued at over $8bn.

This doesn’t change the fact that its bitcoin strategy has swelled MicroStrategy’s balance sheet. Its digital assets increased 97.3% year-over-year in 2023, and accounted for 76% of total assets, which grew by 97.5%.

Revenues from MicroStrategy’s software business actually fell 0.6% from 2022, but thanks to its bitcoin strategy, its stockholder equity increased from a deficit of $383.1m to $2.2bn.

For MicroStrategy investors, it has paid to look beyond revenue as the defining factor of a stock’s purity. MicroStrategy’s software arm generated a $96.3m profit in Q4 2023, but the market value of the bitcoin it held at the end of the quarter increased by $3.8bn, or 88%, from Q3.

The company spent $1.2bn on new bitcoin assets during this period, but its pre-existing bitcoin reserves increased in value by $2.6bn, dwarfing the contribution that the company’s software profits added to its balance sheet during the quarter.

In other words, while MicroStrategy is a software stock as far as its revenue is concerned, bitcoin price movements account for the vast majority of changes in its shareholder equity.

Spot the Difference

Despite accounting rules that mark down the carrying value of bitcoin holdings, Saylor’s strategy has been a success since its launch in August 2020, largely due to bitcoin’s outsized gains during that period.

Given the volatility of bitcoin, and the amount of high-profile events that have occurred over the last three and a half years (such as the collapse of FTX in 2022), it is unsurprising that both MicroStrategy stock and spot bitcoin prices have seen giddy highs and crushing lows during that period.

As of 15 February, bitcoin has gained 356.5% over the life of MicroStrategy’s bitcoin uptake strategy, while the company’s stock has gained 521.3%.

However — and despite Saylor insisting the opposite — recent developments could undermine the relationship between MicroStrategy stock and bitcoin prices.

The SEC approved 11 spot bitcoin ETFs in January, meaning that investors who wanted exposure to bitcoin’s price movements without directly owning it suddenly had alternatives to MicroStrategy.

Saylor told Bloomberg TV in December that the launch of such ETFs wouldn’t threaten MicroStrategy since its stock was already a fee-free, leveraged bet on bitcoin. Historically, this appears accurate; almost every time the bitcoin price has increased since August 2020, MicroStrategy’s stock has gained more than the cryptocurrency. That volatility has, at times, also meant the stock has taken steeper falls.

Since the launch of spot bitcoin ETFs on 11 January, both assets have increased in value, but MicroStrategy’s gains of 43.6% have outpaced bitcoin’s 11.8%.

It is noteworthy that Saylor himself sold as many as 5,000 shares during the week prior to the launch of spot bitcoin ETFs.

Other erstwhile bulls have also signalled their hesitancy. While it remains the top holding in the fund, Amplify’s BLOK ETF sold 15,772 MicroStrategy shares in Q4 of last year, according to WhaleWisdom data.