MicroStrategy (NASDAQ: MSTR) has become one way many investors have found to get into Bitcoin (BTC). Looking at the returns of the two over the past three years, investing in MicroStrategy has been far superior to investing in Bitcoin. The total return over that time for each has been 177% versus 51%, respectively. But why is that the case?
Based on the reports of new Bitcoin purchases, the value of the company’s Bitcoin is around $16 billion today. However, the technology company’s market capitalization is $34 billion. Somewhere in MicroStrategy, investors see an extra $18 billion in value over just its cryptocurrency. So, where does this extra value come from?
Breaking Down MicroStrategy’s Lesser-Known Business: Software
Looking at MicroStrategy, there are two big parts of its business: bitcoin purchases and its software. The software business is based on its MicroStrategy ONE data analytics software. It offers business intelligence tools, allowing users to take advantage of machine learning and create custom analytics. Looking at this part of the business, revenues are declining.
From Q1 2023 to Q2 2024, revenue went from $122 million to $111 million, a drop of 9%. The business is unprofitable as well, and that unprofitability is getting worse. In Q1 2023, the software business’s net loss was half a million dollars.
In Q2 2024, that loss has increased exponentially to nearly $19 million. These numbers are on a non-adjusted basis. On an adjusted basis, the business has been profitable over those periods. However, it still only brought in $2 million in adjusted net income last quarter.
Still, no matter how you slice it, the software business is making little to no money. The argument could be made that the business is poised to grow, so the fact that it isn’t making money now doesn’t mean it won’t in the future. The software business’s subscriptions and services revenue did grow by 21% last quarter.
However, over half of the software business revenue comes from the support it provides; so, revenue still fell by 7%. But its subscription billings, an indicator of future revenue, increased by 45%. These increases breathe some life into the argument that the software business could see higher revenue in the future.
But, with only $2 million in adjusted net income last quarter, it's hard to say that the software business is worth $16 billion, even with future revenue in mind.
MicroStrategy’s Main Value Proposition: A Leveraged Bitcoin Investment
The other big value add that MicroStrategy emphasizes, and many have come to know it for, is its ability to issue extremely low-cost debt to buy Bitcoin. Through issuing mostly convertible bonds, the company has over $3.8 billion in debt with an average interest rate of 1.6%.
This is far lower than any individual would be able to borrow funds at, with the effective Fed Funds Rate at nearly 5%. The company recently announced it completed another offering of $1 billion convertible bonds. This will bring the company’s average interest rate down to 1.4%. By investing in MicroStrategy, investors can get leveraged investments in Bitcoin at a far lower rate than they otherwise could.
This is why many who believe in Bitcoin are putting a significant premium on MicroStrategy over Bitcoin itself. However, because convertible debt could be converted into equity, there is a potential for shareholder dilution. This would eliminate significant value from the low-cost debt strategy, especially since nearly 90% of the company’s debt is convertible.
MicroStrategy’s Bitcoin Acquisition Is Adding Value, but Is It Enough at This Price?
The company addresses this idea using its BTC Yield measurement. After accounting for possible dilution, this shows the added value of investing in MicroStrategy over Bitcoin. It achieved a positive BTC Yield of 12% in 2024 and expects it to be between 4% and 8% over the next three years. This shows that the strategy is adding value. However, is it adding enough value to justify the company’s $16 billion valuation over its Bitcoin holdings?
To me, the company's valuation is over double the value of its Bitcoin, while it only provides a 4% to 8% yield compared to paying for Bitcoin itself.
