Summary MicroStrategy has leveraged its stake in Bitcoin with borrowed money to produce lucrative investment gains during 2023-24. The flip side is, downside risks will be exaggerated if and when Bitcoin falls hard again. The Company's operating business failing to produce income, on top of investors paying 2x the market value of its Bitcoin holdings are other bearish issues to consider. A share price drop to zero, or close to it, for MSTR is a real possibility, given Bitcoin crashes later this year and/or 2025. MicroStrategy Incorporated ( MSTR ) has ridden the Bitcoin ( BTC-USD ) craze amazingly well, leveraging with borrowed money its current 214,400 stake in the world's leading cryptocurrency. It's a brilliant investment strategy to employ when you are speculating on an asset going straight up in price, especially with the pyramiding plan of buying high and higher prices executed by management. Share ownership is basically a margined position in Bitcoin. The problem arises when the world's main cryptocurrency slides hard in price, which it has done numerous times since invention during 2009. You can review below the high correlation in price swings between the two assets over the past five years. YCharts - MicroStrategy vs. $Bitcoin, Price Changes, 5 Years What is different today vs. the 2021 peak in quotes for both (in a critically negative way for MicroStrategy owners) is Chairman Michael Saylor has led the effort to load the company with borrowed funds in U.S. dollars to purchase cryptos at high quotes over the last 12 months. The company just issued another $700 million in convertible debt to finance the purchase of additional Bitcoins, support day-to-day operations, and repay previous borrowing. MicroStrategy - Investor Relations Homepage, June 12th, 2024 My worry is Bitcoin prices could just as easily collapse, as rise further from $67,000. Who knows for sure, since cryptos are a confidence and excess money game in the overall economy. Any type of liquidity crunch, recession, or black swan event could knock Bitcoin from its perch. As the consequence of extra debt vs. 2022's Bitcoin implosion period, MicroStrategy is actually a much "riskier" bet than 3-4 years ago, in my opinion. In fact, a price drop of -50% in Bitcoin would create net losses on MSTR's total stake built since 2020. Plus, a percentage drop beyond this level could wipe out all book value for the company, with many convertible debts callable for cash. In the end, a -70% to -80% Bitcoin drop could ruin MicroStrategy, with a margin-call like situation an outlier possibility. Let me explain some of the math in a bear market for cryptocurrencies. StockCharts.com - MicroStrategy, 12 Months of Daily Price & Volume Changes StockCharts.com - $Bitcoin, 12 Months of Daily Price & Volume Changes Bitcoin Leverage has a Downside At the end of March, MicroStrategy held $240 million in current assets like cash and receivables, just $84 million in net property and equipment, and roughly $5.1 billion in Bitcoin investments (at cost), with $920 million in deferred tax assets. All this was matched against $3.9 billion in total liabilities, $3.6 billion of which was debt. Cost-accounting stockholder equity of $2.4 billion supported the $28 billion equity market capitalization at that point in time (slightly above the $27 billion total currently). MicroStrategy - Q1 2024 Earnings Release, Bullett Point Summary, April 29th, 2024 On April 26th, 2024, the company reported owning 214,400 Bitcoin at an average purchase cost of $35,180. So, using today's Bitcoin price of $67,000, MSTR holds a liquidation crypto value of $14.35 billion, before capital gains taxes. When you include likely taxes, subtract all debts and liabilities, and add other assets into the equation, a net/final liquidation value in the $11-12 billion range means new buyers of MSTR stock are paying more than DOUBLE its true underlying worth in the middle of June (quite a premium to begin with). But here's the rub. If Bitcoin prices are hit by its 4th drop of -70% to -80% in price over the last 11 years, MicroStrategy's rising debt load could morph into a serious going-concern problem. For example, at a Bitcoin price of $15,000, MSTR could be sitting on greater than $4 billion in investment losses, with a crypto-backed asset value of $3.2 billion (vs. $14.35 billion presently). AND, if additional Bitcoins are purchased at peak pricing with borrowed funds the rest of the year, carried losses could balloon a year or two down the road. In a mark-to-market exercise, MSTR could be sitting on a NEGATIVE -$2 billion number or worse in liquidation book value, without aggressive Bitcoin selling soon. In other words, another Bitcoin swoon could effectively move the company into insolvency rather quickly (with a stock price of ZERO), if many of its bonds with convertible for cash clauses are called. The company may not have enough Bitcoin assets to sell and repay its debts, as one possibility. Insider Selling What do insiders and management think about their stock, and the odds of future riches? If you listen to Michael Saylor on television, he is quite optimistic. However, his personal trading in shares reveals far less bullishness. Including his activity, officers and directors have sold roughly $500 million in stock value (at the time of each transaction) over the last 12 months, with NO insider buys reported to the SEC in its Class A shares. This liquidation total represented about 20% of their Class A holdings. Nasdaq.com - MicroStrategy, Insider Transactions, 12 Months Mr. Saylor did retain 56% voting control of the company through 1.96 million Class B shares held in February , each with 10 votes vs. the publicly traded Class A with one vote. In terms of an economic interest in MicroStrategy (both share classes are equally weighted), the Chairman owned 11.6% of the company. Michael Saylor's personal tax-evasion tactics are another huge red flag to consider. Just a few weeks ago, he agreed to pay $40 million in back taxes due to the government. My worry is company managers avoiding the payment of taxes may be symptomatic of other problems with day-to-day management decisions at the operating business. According to a Seeking Alpha article explaining the tax situation : Chairman, Michael Saylor, agreed to pay $40M to settle a civil complaint over his alleged failure to pay personal income taxes over a number of years. The company had also been named in the suit on allegations that it conspired to assist Saylor in his alleged failure to pay income taxes. The lawsuit was filed on Aug. 31, 2022 , by the Washington, DC's attorney general. Under the consent order, the company and Saylor agreed to pay $40M to resolve the case. However, in a separate agreement between the company and Saylor, Saylor will pay the settlement amount in full, "and the company will not be obligated to make any contribution to the settlement payment," MicroStrategy said. In resolving the issue, the company and Saylor did not admit to the allegations or any violation of law or regulation. Final Thoughts Reality check. The "operating" business (outside of Bitcoin ownership) has not earned an honest profit in many years. Operating losses have been reported since 2018. Below are Wall Street analyst consensus projections for 2024-25. The hope is MicroStrategy's business, excluding Bitcoin trading, will generate a minor profit in 2025. Seeking Alpha Table - MicroStrategy, Analyst Estimates for 2024-25, Made June 17th, 2024 Shareholders in MSTR are speculating on Bitcoin's future price with leverage, pure and simple. Just like uncommon upside is possible given strong Bitcoin price gains above $100,000 this year, any unexpected collapse in cryptocurrencies will translate into monster losses for MicroStrategy owners. Don't say it cannot happen. Believe it or not, the double-top pricing pattern of 2024 appears to be a look-alike cousin to the one outlined in 2021. During the following Bitcoin implosion, MSTR fell -83% in price into December 2022 (measuring from top to bottom). A mirror drop from this year's $2,000 quote peak would put the price at $340 sometime next year. YCharts - MicroStrategy vs. $Bitcoin, Price Changes, April 13th, 2021 to December 31st, 2022 Yet, the added debt load this time around could mean an even bigger price decline may be ready to play out on another -80% Bitcoin collapse. I am forecasting such an experience could drop MicroStrategy shares to ZERO, or close to it. On the flip side of the bearish coin, further Bitcoin gains will likely support some sort of advance in MicroStrategy shares, maybe even a large gain. It's really a gambler's game, with no underlying math to help in making a wager. For myself personally, the risks are just too great. I am in my middle-50s for age, and cannot afford -80% or greater losses on investment. Youngsters have time to make up sizable losses. I do not. After investing and trading for 38 years, I feel it my obligation to explain the downside risks in MicroStrategy. If you continue to own it, or decide to buy shares, you cannot say the risks were not properly explained to you. I rate MSTR a Strong Sell and avoid for most investor accounts.
