June 17, 2022

Breakingviews: MicroStrategy is a conglomerate with bitcoin twist

by Breakingviews.

MicroStrategy, read literally, means a very small amount of strategy. That seems right. The company with that name, a software firm, has lost over $1 billion after founder Michael Saylor made an unusual, debt-funded bet on holding cryptocurrency. Yet investors are valuing the company at more than the sum of its parts when they should probably be doing the opposite.

Saylor’s company has lost 70% of its market value this year and was worth $4.2 billion on Wednesday evening including net debt. For that, an investor gets a claim on MicroStrategy’s store of over 129,000 bitcoins as of the end of last quarter, which it bought for $4 billion but are now worth $2.7 billion, and a largely mature software business. Analysts think that part will produce just over $100 million of EBITDA in the next 12 months, according to Refinitiv. Put this on IBM’s multiple of 10, and it’s worth $1 billion. In short, the market is saying MicroStrategy is worth over 10% more than its components.

That’s strange for a few reasons. Software might provide some diversification, but investors have seen their investment largely track the volatile crypto market. The two businesses don’t complement each other in any obvious way. Those wanting exposure to bitcoin would be better off directly buying and selling in the market. And the stock volatility shouldn’t be attractive to software investors.

There’s also the headache of MicroStrategy’s debt. The company received favorable terms – $1 billion of it is in a kind of convertible bond that doesn’t pay interest. The company may have to stump up more collateral to back a bank loan of some $200 million if bitcoin falls much further. But it has about $2 billion of unencumbered bitcoin so that needn’t be a problem.

Two risks remain. One is that in three years MicroStrategy’s debts start coming due. The safe choice would be to sell the firm’s bitcoin holdings to repay borrowings early and focus all attention on its software business. That doesn’t seem to be on Saylor’s agenda: As bitcoin collapsed, he changed his Twitter profile picture to one with laser eyes, a meme for being bullish on crypto. The other danger is that investors are just paying too much for what is basically a conglomerate but with a modern spin.

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