Reflexivity has been MicroStrategy’s secret sauce. The corporate prints fairness or equity-linked securities to purchase bitcoin, boosting bitcoin’s worth, which in flip inflates MicroStrategy valuation. This enables it to subject extra inventory and repeat the cycle.
This MonoStrategy has enabled MicroStrategy to amass 2.25 per cent of all bitcoin in existence, a hoard price round $46bn at present costs. The corporate trades at practically double the worth of its underlying bitcoin holdings, a testomony to perception of some traders in Michael Saylor’s mission.
Nonetheless, MicroStrategy’s shares have now fallen for 9 of the previous 10 buying and selling periods. The wobble means that regardless of the arrival of probably the most crypto-friendly administration in American historical past, there could also be limits to this technique.
Not that Saylor is giving up. The most recent fundraising gambit — a $584mn subject of perpetual convertible most popular inventory — makes an attempt to push the bounds even additional.
Dubbed STRK, this hybrid safety carries an 8 per cent dividend, payable in money or inventory at MicroStrategy’s discretion, and might be transformed into widespread fairness at $1,000 per shares, or round 3 times the present inventory worth.
(For some inexplicable motive, the instrument was offered at a 20 per cent low cost to the liquidation choice of $100 per STRK, producing plenty of confusion, with some media shops akin to Barron’s saying the yield is 10 per cent in consequence.)
It’s an ungainly, unconventional monetary contraption: structurally subordinated to $6bn of present convertible bonds, but senior to widespread fairness, and that includes a deeply out-of-the-money name choice of infinite length.
The bond ground and choice are tough to mannequin, and unsurprisingly, institutional traders have given it a large berth. Even with Barclays as lead underwriter, most professionals desire the comparatively simple convertible bonds.
However Wall Road’s apathy is irrelevant. STRK’s viewers lies elsewhere.
Saylor has framed the providing as an enchantment to “a brand new class of investor”, which, in observe, means retail patrons. STRK, obtainable through Constancy’s platform, boasts a yield far richer than the sub-6 per cent sometimes supplied by boring financial institution preferreds and the tantalising prospect of Certified Dividend tax remedy (although uncertainty abounds — caveat investor, and we’re giving no tax recommendation).
Barron’s, the go-to monetary publication for Principal Road traders, has endorsed it. “Retail traders usually don’t purchase primarily based on fashions,” it writes, recognising that establishments would discover the instrument unappealing.
Certainly, religion in Saylor — bolstered by his frequent social media proclamations and AI-enhanced photos of himself as a digital-age superhero — has confirmed a extra highly effective drive than TradFi evaluation.
For MicroStrategy, STRK represents a brand new avenue to maintain printing equity-linked paper whereas its inventory remains to be buying and selling at a premium to internet asset worth. However its implications for widespread stockholders are much less rosy.
Michael Saylor has stated that he needs to “construct extra clever leverage for the advantage of our widespread inventory shareholders.” In actuality, the brand new safety dilutes their stake whereas pushing them additional down the capital construction.
If the corporate lacks money to pay the dividends, it may well merely subject extra inventory, that means dilution compounds over time. In impact, STRK resembles a everlasting PIK (payment-in-kind) instrument with a never-expiring out-of-the-money name choice, coiled up with probably explosive dilution.
This compounding dilution is sort of inevitable, given how MicroStrategy will wrestle to make the dividends in money.
The legacy software program enterprise loses cash, and bitcoin generates no money movement. Dividend fee would require (1) paying the dividend within the type of extra shares, (2) promoting new shares, or (3) liquidating a few of its bitcoin stash, every choice fraught with its personal problems. In the meantime, the conversion worth of $1,000 per share is actually a moonshot gamble on bitcoin’s continued rise.
STRK offers MicroStrategy with each everlasting capital and a licence to print shares at will. So long as the inventory trades at a premium to its bitcoin holdings, the corporate can hold issuing novel securities and discovering new patrons. In the meantime, with MicroStrategy comprising a sizeable portion of crypto inflows (28 per cent in 2024, based on JPMorgan), it has helped maintain bitcoin’s ascent.
This may hold the music taking part in lengthy sufficient for bitcoin fanatics to foyer the US authorities to undertake the asset as a strategic reserve or, extra prosaically, for insiders to money out at a beneficial worth.
But even probably the most charismatic storytelling ultimately encounters the gravitational pull of fundamentals.
Invoice Ackman realized this lesson final summer season when, regardless of drumming up over $1bn in retail orders, he failed to draw enough institutional assist for his Pershing Sq. USA car. To his credit score, he opted to scrap the deal moderately than jam it into particular person traders.
On 22 November, MicroStrategy closed at an all-time excessive of $421.88, whereas bitcoin surged to $98,998. Bloomberg known as its technique an “infinite cash glitch” on the time and CEO Michael Saylor celebrated with extra hype.
Since then, bitcoin has slipped barely to $96,922 at pixel time, whereas MicroStrategy has tumbled practically 40 per cent. Within the meantime, MicroStrategy’s freshly minted $3bn convertible bond, issued mere days earlier than that November all-time-high, now trades 12 per cent beneath par. For a self-proclaimed “Bitcoin Treasury Firm,” the divergence is peculiar.
MicroStrategy has managed to promote its newest brainchild, however the widespread inventory’s underperformance versus bitcoin suggests the primary crack in Saylor’s grand narrative. It is going to take a look at how lengthy and by how a lot a cult of character can keep untethered to monetary actuality.
