When this writer first read that MicroStrategy founder Michael Saylor was planning to sell $500 million in stock to inflate his Bitcoin stash, I thought it was another half-crazy bet from the principal. crusader and true believer of the flagship cryptocurrency world.
After all, Saylor has already spent almost $4 billion to raise nearly 130,000 coins that are now worth a third less than he paid (read Saylor’s full Bitcoin odyssey story here). The bet went so wrong that in the second quarter, Bitcoin’s cascading price locked MicroStrategy out with a loss of $918 million. Amid the wreckage, Saylor stepped down as CEO to become executive chairman of the enterprise software player whose voting shares he tightly controls. Between the release of the disastrous results and the filing of the bid, Saylor made more headlines in late August when the Washington, D.C. attorney general unveiled a lawsuit accusing the flamboyant promoter of evading 25 million dollars in district taxes by falsely claiming he lives in Florida.
Then I thought again. What if MicroStrategy’s stock was so overvalued that it was less inflated than the beaten Bitcoin? In this case, Saylor might possibly be smart to issue new shares now, when he can sell them well above fundamental value, and park the proceeds in something that is considered, at least in some camps, as a “hard asset”? It would use super-rich currency to buy what is supposed to be an enduring store of value. Then, while MicroStrategy shareholders would still suffer a lot, they would suffer less than if Saylor hadn’t sold the shares to buy more Bitcoin, provided the coins simply held today’s value.
The whole strategy seems outrageous. Bitcoin has proven to be the most volatile major asset class in history, and anything but a gold-like haven for tough times. But if you combine that high probability that MicroStrategy is facing a deep dive and that Bitcoin has fallen so far, it could at least stabilize or even rise, to be sure of a wacky and practically surreal mix of factors, then the Saylor gambit might make some sort of financial sense. Not as much sense as selling all your Bitcoins tomorrow, collecting cash on a rainy day, and striving to revive a slow-growing but fairly profitable software company. But maybe not as daffy as it looks.
Saylor launched overvalued stocks before
In fact, this isn’t the first time Saylor has gathered high-flying stocks to buy Bitcoin. From the time it started buying coins in August 2020 until June 2021, its stock price went from under $150 per share to around $700, following Bitcoin’s explosion. Saylor saw a big opportunity and pounced. Over the next few months, he sold $1 billion worth of stock at average prices of over $700. As a result, a bid that would have diluted its shareholders by 66% before Bitcoin reduced their earnings per share by only 12%. As one short seller told me, “Saylor would have been better off using inflated stocks to buy all his Bitcoin than borrowing $2.4 billion that he will have to repay.
Here’s how the deal could really cushion what looks like an inevitable drop in MicroStrategy shares. The only thing that would prevent a big drop is a jump in Bitcoin price, and the recent trend is anything but favorable. First, let’s look at the fundamentals of MicroStrategy. As of midday on September 13, his Bitcoin warchest had a market value of $2.63 billion, at an average price of $20,300 per coin. This is only $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 and posted a pre-tax profit of just $19 million in 2021, and it barely broke even in the first six months of 2022. (We’ll use profit before taxes rather than net income since MicroStrategy has garnered giant tax carry forward losses that should wipe out levies for years to come.) But let’s assume the best case scenario. Since 2016, its pre-tax profits have averaged $52 million a year.
Once again, MicroStrategy has shown no ability to increase sales or profits. We will therefore apply a zero growth multiple of 15 to these revenues. 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 basics, MicroStrategy looks like it deserves a market capitalization of about $1 billion. The catch: MicroStrategy’s is selling at a valuation of $2.66 billion, or nearly 2.7 times that figure.
Today, its number of outstanding shares is 11.3 million. Say a year from now, if MicroStrategy pulls back to a fundamental value that includes Bitcoin still hovering at the current level of around $20,300, each stock would be worth $88 ($1 billion market cap divided by $11.3 million). shares). It’s as if Saylor never made the new offer and didn’t 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 for simplicity, we’ll assume that he perceives, on average, the September 13 price of $235. This is a substantial dilution of 18.6%, bringing the total number of shares to 13.4 million. But keep in mind that he is using inflated stocks to buy something that might be less inflated. Consider that in mid-2023, the software industry is still worth $780 million and Bitcoin’s price is the same. MicroStrategy would hold $500 million more in Bitcoin, for a total of $3.16 billion, or $760 million more than the $2.4 billion in debt. In total, MicroStrategy’s cap would be $760 million in Bitcoin plus the $780 on the software side for a total of $1.54 billion. It would sell for $115 a share, nearly a third more than if Saylor didn’t buy the coins! (That’s the market cap of $1.54 billion out of 13.4 million shares.)
Clearly, MicroStrategy investors will still be appalled by a drop from $235 to $115, or just over half. But that’s still much better than a drop from $235 to $88, the two-thirds hit that would occur if it didn’t capitalize on the huge overvaluation to grab the extra Bitcoin.
Again, this whole dizzying exercise only works if Bitcoin’s price stays at at least today’s levels. But he doesn’t need to increase for Saylor’s plan to follow some logic. In the end though, this crazy maneuver, if it works, would only soften what is destined to be a hard landing for MicroStrategy, unless, of course, Bitcoin takes off again. Of course, Saylor doubles 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 fanaticism.
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