MicroStrategy’s Bitcoin Wager Has Turned Into A Losing Bet

MicroStrategy
MSTR
embarked on a strategy of using its cash and then debt to buy alternative assets when it announced its June 2020 quarter results on July 28, 2020. Over almost two years since then it has bought 129,218 Bitcoins as of May 2, 2022, per its March 2022 10-Q filing. The company has spent just under $4 billion for an average cost of $30,700.

Unfortunately, since last Thursday, May 12, Bitcoin has been trading a bit over to around $2,000 under MicroStrategy’s breakeven price of $30,700 and it has gotten as low as $26,350. The recent downturn in Bitcoin’s price (over $10,000 or 26% in the past month), driven by the increase in interest rates and a risk off environment becoming more prevalent, has also hit the company’s share price (fallen over $250 or 56% in the past month).

A roller coaster ride

One point to keep in mind is that even while MicroStrategy’s stock fell over 25% last Wednesday to $168.20 (but rebounded to $204.57 by Friday), is down 62% this year and down 84% from its all-time high of $1,272.94 on February 9, 2021, is that the shares are up 67% from $122.74, the day after the company made its initial announcement about buying cryptocurrencies.

As seen in the chart below from StockCharts.com, the shares rocketed up and then quickly pulled back by early 2021. They settled in a broad range of about $500 to $800 from March 2021 to January 2022. The range then moved down to $300 to $500 for most of this year until last week as it has fallen over $100 in just over a week.

For every $100 Bitcoin falls it only takes $1.14 off the value of MicroStrategy’s stock, but for every $1,000 it can impact the shares by $11.45 and if Bitcoin were to fall $10,000 it can wipe out $114 of value from MicroStrategy’s stock. And keep in mind that it has fallen from a high of $68,790 on November 10 last year.

As can be seen in the chart below from StockCharts.com, MicroStrategy’s stock price mirrors Bitcoin’s price movement.

Stock price without Bitcoin’s value

One can calculate how much Bitcoin’s value is embedded in the company’s stock price by taking the number of Bitcoin’s times its price minus the debt associated with it. While this is a moving number since Bitcoin is traded 24 hours per day, as of the close of the stock market on Friday, May 13, per Yahoo! Finance it was trading at $29,283.10.

MicroStrategy’s stock closed at $204.57. This is the calculation to determine the company’s stock value without Bitcoin.

• Bitcoin price of $29,283.10
• Times the number of Bitcoins of 129,218
• MicroStrategy’s Bitcoins are worth $3.78 billion

• Total debt of $2.36 billion
• Net Bitcoin value of $1.42 billion

• MicroStrategy stock price of $204.57
• Times the number of shares of 11.289 million
• Market cap equals $2.3 billion

• Minus Bitcoin value of $1.42 billion
• Equals market cap of $887 million
• Or $78.60 per share

MicroStrategy’s stock value based on its earnings

Yahoo! Finance has MicroStrategy EPS at $3.85 and $3.90 for 2022 and 2023, respectively. This would make the share’s P/E ratio 20.4x and 20.2x, respectively for those years based on the $78.60 per share calculation. For a company with such low growth the valuation level is on the high side since the S&P 500 is trading at a forward P/E ratio of 16.6x per FactSet, though it isn’t totally out of line.

Bitcoin at $18,278 is a critical number for MicroStrategy

MicroStrategy has taken on $2.36 billion in debt to buy Bitcoins, along with using over $300 million in cash it had on its balance sheet in June 2020 and the free cash flow it has generated since then. The total amount of money spent on 129,218 Bitcoins is $3.97 billion for an average price of $30,700.

While it would have to fall over $10,000 to reach $18,278, if it did the company’s Bitcoins would equal the debt. And if it were to fall lower, then MicroStrategy’s Bitcoins would be worth less than the debt.

Bitcoin can offer a lot of upside

There is the scenario where Bitcoin roars back to $40,000, $50,000 or even exceeds its previous high of $68,789. In these cases MicroStrategy’s stock would follow Bitcoin’s price move higher. An investor needs to understand the downside that comes along with the upside with MicroStrategy, which is totally dependent on Bitcoin’s price movements.