MicroStrategy's Infinite Money Machine?

Michael Saylor’s MicroStrategy (MSTR) began accumulating BTC in 2020 and never looked back, transforming the get-along software company into a top-performing equity investment of the past two bull cycles in the process.

Despite reporting substantial losses every quarter in 2024, MSTR is still handily outperforming BTC, up an additional 200% on the year-to-date basis after parabolically doubling in price since September!

At MicroStrategy’s most recent earnings conference on October 30, firm executives unveiled their “21/21 Plan,” a strategic initiative to raise $42B in capital (equal to 80% of MSTR’s market capitalization at the time of analysis) from a 50/50 mix of share sales and debt issuance in what is slated to become the largest secondary share offering in U.S. stock market history.

Today, we’re unpacking Michael Saylor’s infinite money machine and exploring how MicroStrategy intends on becoming a trillion dollar company 💸

🧐 What is Saylor Building?

MicroStrategy became the first publicly traded company to implement a BTC treasury strategy with its purchase of 21,454 tokens for $250M announced back in August 2020, an initial investment that has returned nearly 500% during its 4-year lifespan.

As of September 2024, MicroStrategy holds 252,220 bitcoin.

Although MicroStrategy has retained its status a BTC behemoth among direct corporate holders, the introduction of spot BTC ETFs in January 2024 reshaped the top holder landscape, supplanting MicroStrategy with BlackRock as the fourth largest entity to hold BTC behind Binance, Satoshi, and Coinbase.

While the market initially valued MicroStrategy’s worth to be five times greater than that of its BTC bag, this premium began dissipating as holders came to understand they would be perpetually diluted to fund additional BTC buys, and by late 2021 as bear market malaise set in, MSTR found itself trading at a discount to its net asset value (NAV).

Unlike in 2020 when MicroStrategy first began accumulating BTC, investors no longer need to exit traditional markets to access crypto asset exposure, yet even in the ETF era, MSTR shares have continued to trade at a persistent premium since February 2024.

Compared to spot ETFs, which simply track the performance of BTC less a management fee, MicroStrategy offer its shareholders with a BTC accumulation strategy vehicle that grows the number of tokens attributable to each share.

When MSTR shares are trading at a premium to its BTC holdings, MicroStrategy can expediently raise capital through two avenues: at-the-money share offerings and convertible bond sales. Authorization of at-the-money share offerings enables MicroStrategy to issue and sell new MSTR shares into the market to raise cash, meanwhile, convertible bond sales allow MicroStrategy to borrow money today on extremely desirable terms in exchange for debt obligations that can be redeemed for cash or a certain amount of MSTR shares in the future. 

In its Q2 2024 earnings report, MicroStrategy first introduced “BTC Yield” as a key investor performance indicator to highlight quarter-over-quarter growth in BTC holdings attributable to each share.

Although MicroStrategy unorthodoxly tapped a $205M BTC-collateralized term loan from Silvergate in March 2022 as the bear market took hold and the share premium flipped to a discount, crypto industry pundits frequently liken the company to a money printing machine, as its executives appear able to raise limitless amounts of cash to purchase BTC via share dilution during periods of market exuberance.

In a recent interview with analysts at sell-side research firm Bernstein, Michael Saylor unveiled his company's endgame as metamorphosing into a full-fledged bitcoin financial services provider.

When shareholders purchase MSTR, they are not only buying into BTC, but also management’s ability to productively utilize capital markets and the balance sheet to productively generate even more returns.

🧐 Investment Considerations

MSTR has certainly outperformed BTC in 2024, but has also historically displayed much higher volatility, experiencing more drastic swings to the downside alongside its larger rallies to the upside. Speculators seeking leveraged BTC exposure may be better off simply leveraging the underlying.

While shrewd utilization of public capital markets enables MSTR shareholders accumulate an increased amount of BTC, MicroStrategy’s ability to do so is predicated on continued investor willingness to buy into shares at a premium.

As displayed during 2022, MSTR shares are susceptible to trade at discounts to NAV for prolonged periods of time. Should a convertible bond mature amid an ongoing discount to NAV, MicroStrategy will be forced to dilute investors with unexpectedly large share sales or sell BTC holdings to redeem outstanding debentures.

Upcoming FASB rule changes that can be applied starting this December will allow digital assets to be reported at their fair market value. Although MicroStrategy has posted three consecutive quarters of net income losses in 2024, adoption of these new accounting standards will positively impact the company’s financials, making MSTR a potential candidate for S&P 500 inclusion. Its addition to this index, or another like the Nasdaq 100, would unlock passive price-indiscriminate flows that can be sold into to accumulate even more BTC!

Compared to an investment in unproductive spot BTC, MicroStrategy shares have the ability to accrete additional tokens, and unlike companies in the extremely competitive crypto mining sector, MicroStrategy is meaningfully differentiated by a massive BTC moat. Investors can rest easy knowing that someone is likely willing to purchase shares at a premium or lend cash on desirable terms, so long as a desire to speculate on BTC exists.