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Will MicroStrategy's Bitcoin Strategy Pay Off?

Amit Singh - Barchart - Mon Nov 4, 12:38PM CST

Shares of MicroStrategy (MSTR) have experienced a remarkable surge in 2024, boasting a staggering year-to-date increase of 260%. This impressive rally reflects the company’s growing Bitcoin (BTCUSD) holdings and the rising value of the cryptocurrency, which have allowed MicroStrategy to outperform even chip giant Nvidia (NVDA), which has climbed by 178% in the same time frame.

The stock's recent volatility follows MicroStrategy’s ambitious plan to raise $42 billion over the next three years to further boost its Bitcoin acquisitions.

A Bold Move for Bitcoin

MicroStrategy’s plan involves raising $21 billion through equity and another $21 billion via debt. MSTR plans to use this substantial capital to enhance its Bitcoin holdings, positioning Bitcoin as a core treasury reserve asset.

Once known primarily for its AI-driven analytics and business intelligence software, MicroStrategy has transformed into a hybrid entity, intertwining technology with a robust investment strategy focused on Bitcoin.

Currently, it is the largest corporate Bitcoin holder, with 252,220 Bitcoins valued at around $18 billion. MicroStrategy's belief in Bitcoin’s long-term value, supported by its limited supply, indicates that the company could reap significant rewards from its Bitcoin assets as global adoption grows.

Further, to address potential interest costs stemming from its capital raise, MicroStrategy plans to manage its capital strategy effectively, alternating between equity and debt raises as necessary. This strategy will help MSTR maintain its leverage target and ensure continued access to equity capital on favorable terms while ensuring its cash flows from the software business can support its ambitious Bitcoin initiatives.

Recent Bitcoin Purchases

Since June 30, 2024, MicroStrategy has purchased 25,889 Bitcoins at a total cost of $1.6 billion, averaging around $60,839 per Bitcoin. The price of Bitcoin has surged this year, getting a boost from the recent approval of spot Bitcoin exchange-traded products (ETPs), which have attracted significant institutional interest. This indicates a growing acceptance of Bitcoin as a legitimate asset class within the financial sector.

MicroStrategy has also successfully raised $1.1 billion through its at-the-market equity offering program and secured $1.01 billion from the issuance of convertible notes due in 2028. A portion of these funds was used to redeem $500 million in senior secured notes due in 2028, demonstrating the company's commitment to effective debt management.

To support its Bitcoin acquisitions, MicroStrategy employs three main strategies: debt financing, equity offerings, and cash flow from its software operations. With $4.3 billion in convertible debt at a fixed annual cost of 0.8%, the company is in a solid financial position to fund its Bitcoin initiatives. Since August 2020, it has also allocated $836 million in cash from its balance sheet toward Bitcoin investments.

Strengthening the Software Business

MicroStrategy continues to solidify its software business. The third quarter of 2024 marked a significant pivot towards its cloud offerings, with non-GAAP subscription billings growing by 93% to $32.4 million—a reflection of the firm’s successful migration of existing customers to the cloud. This growth trajectory indicates strong demand for MicroStrategy’s cloud platform.

While the transition may lead to short-term declines in product license and support revenues, the long-term outlook remains promising, with expectations of increased subscription service revenues. This strategic shift enhances customer engagement and bolsters retention rates, thereby contributing to the company’s overall revenue growth and supporting its Bitcoin investment strategy.

Analysts Are Bullish on MSTR Stock

Wall Street is optimistic about MicroStrategy's future, and analysts maintain a “Strong Buy” consensus rating. However, the average price target of $223.44 is lower than its current market price.

However, the stock is expected to benefit from an anticipated rise in Bitcoin prices, especially as regulatory barriers around digital assets continue to diminish. This could lead to an upward revision in analysts’ price targets.

Conclusion

MicroStrategy’s aggressive Bitcoin investment strategy and solid software business fundamentals position it uniquely in the market. While challenges remain, the company’s innovative approach to capital management and growing acceptance of Bitcoin as an investment asset makes it a compelling stock for investors seeking exposure to the cryptocurrency.

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On the date of publication, Amit Singh did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.