Summary MicroStrategy is shifting its focus from software licensing to subscription-based services and has launched a new customizable chatbot tool. The company has decreased its headcount by 10% as it faces challenges in growing the topline. Insiders have sold a significant amount of their holdings, and the company's shares are trading at a significant premium to the value of their Bitcoin holdings. MicroStrategy ( MSTR ) is currently undergoing a major shift in their core business objectives as the firm migrates from software licensing to subscription-based services. The firm has recently launched a new BI/AI customizable chatbot tool that is said to assist with customers’ business intelligence needs. As MicroStrategy is transforming their foundation, challenges may be afoot as the firm decreased their headcount by 10% on the back of consistently declining revenue. Net of the firm’s Bitcoin holdings, I believe that the organization is struggling with growth and may see further challenges in the near future. In addition to these risks, insiders have sold a tremendous amount of their holdings on top of the firm’s ATM equity sales. From a value perspective, MSTR shares are trading at 1.98x the value of their Bitcoin holdings as of April 10, 2024, pricing shares at a premium to Bitcoin spot ETNs. Given these factors, I rate MSTR shares a SELL with a price target of $790/share at 1x the value of their Bitcoin. Operations MicroStrategy is currently in the process of reinventing its core business intelligence business as they transition customers from software licensing to their cloud, subscription-based services. MicroStrategy’s software is currently offered across all major hyperscalers, including Azure, AWS, and now GCP. Subscription-based services accounted for 16% of revenue for FY23 as management seeks to transition more customers to their cloud offerings. Given the nature of MicroStrategy’s broader business plan of acquiring Bitcoin, this should allow for more visibility into future revenue generation, as deferred revenue will be known for the period. One fundamental challenge I see in MicroStrategy’s legacy business is their focus on business intelligence while attempting to pair it with artificial intelligence. Though the two uses of data are relatively synonymous, I believe that the firm may not have the competitive edge for AI-related applications as their larger, more advanced software platform competitors like Palantir ( PLTR ). For the most part, MicroStrategy’s AI capabilities are appealing to firms that are seeking to develop a customized, internal chatbot. Though I cannot speak on the cost comparison for customers when considering competing AI-related platforms, I do believe that this is a nascent approach to facilitating revenue generation to fuel the firm’s Bitcoin purchases. My rationale behind this is that the firm cut 10% of their headcount in sales & marketing and R&D in the last year in an attempt to bolster margins. This strategy did work to the firm’s benefit as their adjusted gross margin improved from -$1,212mm in FY22 to -$46mm in FY23. Though this can be seen as a significant improvement, I believe it will potentially pose a challenge to the firm’s forward growth trajectory in this transitory phase. The firm has already been faced with declining revenue generation; it declined by -6% in q4’23 and -1% for the full year. I believe some of this is in part due to the transition from selling software licenses to subscription sales, in which this is typically anticipated; however, the firm’s revenue has been in a decline for the last decade. Seeking Alpha I do believe that the firm is more so positioning itself to act as a leveraged Bitcoin holding company with their legacy BI business as a continued project. It has been made clear that the primary objective of any capital raises, whether through operations or the capital markets, is primarily diverted to Bitcoin holdings. As of their q4’23 release, the firm holds 190,000 Bitcoins on the balance sheet, up from 132,500 from the year prior. There are a few details in the business’s operations that draw my attention. One aspect about this operation that draws my attention is that the firm raised $1.2b in equity sales to purchase more Bitcoins in q4’23, most of which were diverted to MacroStrategy, a separate holding entity for their Bitcoin holdings. I believe the sole purpose of this subsidiary is to both hold Bitcoin and shield the firm’s Bitcoin holdings from any financial hardships if they were to arise. Given that the solvency of the firm’s operations now depends on the value of Bitcoin, I believe that if Bitcoin were to fall under their aggregate acquisition price for an elongated period of time, which is less plausible since Bitcoin spot ETNs entered the market, the firm may enter a period of financial hardship given their declining revenue stream. Another factor that raises concern is Michael Saylor’s stock sale in MSTR shares in the last few days starting April 8, 2024. On April 8, 2024 , Mr. Saylor sold 5,000 shares for proceeds of $7.6mm. The following day on April 10, 2024 , Mr. Saylor sold an additional 4,006 shares for proceeds of $5.7mm for a total sum of just over $13mm. I believe Mr. Saylor is being opportunistic in his stock sales, as shares have reached their all-time high in recent years. In the last year alone , Mr. Saylor has sold 285,000 shares of MSTR stock. Given the company’s drive to bolster their position in Bitcoin holdings through equity and debt raises, I believe his stock sales are counterintuitive to his overall strategy. Mr. Saylor is not alone, as insiders have made 120 MSTR sales transactions in the last year with no share purchases made. Financials Corporate Reports My investment thesis for MSTR shares is relatively aligned with my thesis on Bitcoin mining firms like Marathon Digital Holdings ( MARA ) and CleanSpark ( CLSK ) in which holding these firms as a proxy for holding Bitcoin is no longer necessary with the launch of Bitcoin spot ETNs. I believe that with the launch of these ETNs, these firms should be valued based on operational excellence as opposed to their Bitcoin holdings given that the firm adds an extra layer of operational risk. Valuation & Shareholder Value Corporate Reports From a valuation perspective, I believe MSTR shares have surpassed their reasonable valuation at 53.55x trailing sales. I believe that the firm will face a continuation in declining sales going forward, resulting in further downside risk to the share's value. Corporate Reports Given the access to Bitcoin ETNs, I believe it is prudent to also do a comparison for their Bitcoin holdings. Considering MSTR as a proxy for Bitcoin holdings, the firm’s shares trade at 1.98x the value of Bitcoin as of April 10, 2024. The price array above begins at the firm’s aggregate acquisition price of Bitcoin and follows through $80k/btc. If shares were to trade 1:1 with Bitcoin, shares should be priced at $790.45/share, a -50% downside risk potential. Corporate Reports I believe that given the various tacked-on risks to MicroStrategy’s business when compared to holding Bitcoin spot ETNs, I believe that MSTR shares are significantly overvalued. I provide MSTR shares a SELL recommendation with a price target of $790/share at 1x BV of Bitcoin.
