Today let’s take a look at this company called MicroStrategy, taking a spin to the crypto land.
Founder and CEO
It was founded by Michael Saylor in 1989. Today, he remains tightly in control of the company as the Chairman and CEO. He has 25% ownership of the common and 72% of total voting power. Over the last 9 months, he is popping up everywhere in financial news and channels related to bitcoin and the crypto market at large.
He has a bit of a colorful background. On one hand, in 2000, he was part of an alleged accounting scheme that overstated the company’s earnings resulting in multi-million dollar settlement payments. On the other hand, in 2012, he wrote a book called The Mobile Wave. He argued that mobile computing and big tech would dominate the world, pounding the table on stocks like Apple, Amazon, Facebook, Google and etc. And it was right on!
Now he is pounding the table again, this time on bitcoin. And he is doubling and tripling down through MicroStrategy. Since August 2020, the company has bought $2.2bn of bitcoin, issuing $1.7bn of convertible debt. Last 2 weeks, the company raised another $500mm of secured bonds and filed as much as $1bn of at-the-shelf stock offering. This would increase its bitcoin holdings by another 40-50%. If there is a real-life example today of a concentrated levered bet on something, this is it! Recently I have also come across this fairly comprehensive interview of him on YouTube (link here) so you can listen to him first hand. Pretty fascinating.
The Business
For the longest time, MicroStrategy provides enterprise analytics software. Before mid-2020, the software business has been in slow gradual decline since 2014. It does enjoy fairly high gross margin at ~80%. However, sales and marketing ate up almost half of the gross profit, with R&D and G&A consuming large portion of the rest.
Couple things changed in 2020. First, they were able to lower their sales and marketing noticeably, as more sales being done on digital channels than in-person. Second, the software business was back to growth in 3Q 2020. The business could have benefitted from marketing as a result of the CEO being in the public domain everyday. Third, obviously as alluded to earlier, the company branched out into a new strategy of acquiring and holding bitcoin. This by itself could in turn bring new opportunities to the analytics software business.
Valuation
In the beginning of 2020, the stock was at ~$150/share. It rallied to the recent peak of ~$1,300/share in Feb 2021. As of writing, it is back down to around low-$600s/share. The drawdown coincides with sell-off in bitcoin price, giving it an enterprise value of ~$9bn.
To understand this valuation, let’s first look at the software analytics business. It has great gross profit economics but also faces intense competition from IBM, Microsoft, Salesforce, SAP and the like. Accounting for the recent growth and improved margin profile, software is doing ~$100mm EBITDA over last twelve months. Perhaps it can be valued at 10-20x, giving it $1-2bn of value.
In this case, the remaining enterprise value would value the company’s bitcoin holdings at $70-80k/bitcoin. That’s more or less double the current bitcoin price of $35-40k. Perhaps I am under-valuing the software business. Perhaps the stock is being bid up due to institutional demand for bitcoin exposure but constrained from buying bitcoin itself. Either way, for individuals like you and me, if we want bitcoin exposure, we are most likely better off DIY, doing it ourselves.
