Andrew Bary

MicroStrategy shares are adding to large recent gains, lifting the valuation of the cryptocurrency play to close to three times what its holdings of Bitcoin are worth.

That could make the stock vulnerable to a pullback. Investors can get Bitcoin exposure much more cheaply through exchange-traded funds such as the $23 billion iShares Bitcoin Trust that trade roughly at parity to the value of their holdings of the coins.

Near midday on Friday, MicroStrategy shares were up 3% to $243 after hitting a record high earlier in the session. The stock is up 12% this week and has more than doubled since early September. Bitcoin was up less than 0.5% Friday to $68,440 and has risen 28% since early September.

So far this year, MicroStrategy stock has nearly quadrupled, while Bitcoin is up more than 65%.

Barron's estimates that following those moves, MicroStrategy's value is nearly three times that of its Bitcoin stake, adjusting for debt and the value of the company's software business. The current premium appears to be the highest in three years; there was little premium at the start of 2024.

Here is our math. MicroStrategy held 252,200 Bitcoin in mid September, according to an 8-K filing the company posted with the Securities and Exchange Commission after issuing $1 billion of convertible debt.

MicroStrategy has about $4.3 billion of debt outstanding and a money-losing software business with about $500 million in annual revenue, which could be worth $1 billion. The Bitcoin holding is now worth around $17 billion. The company's current market value is $47 billion, based on the share count in the company's latest 10-Q filing.

That suggests the company is valued at around 2.9 times the value of its Bitcoin stake, we estimate, up from about 2.3 times earlier this month. Put another way, investors are effectively paying almost $200,000 for each of the company's Bitcoin, Barron's estimates.

So why is the stock so strong? There could be pressure on short sellers to cover their positions. Short interest stood at around 30 million shares on Sept. 30, or 17% of the available float, Bloomberg data show.

Some investors may think that a win by Donald Trump in the presidential election will be bullish for Bitcoin and therefore MicroStrategy. Trump has praised Bitcoin and other cryptocurrencies, saying this summer that he wants the U.S. to be "crypto capital of the planet."

Another factor could be that investors could be bullish on the company's Bitcoin strategy, which partly involves selling debt, including convertible bonds, to fund new Bitcoin purchases. MicroStrategy views itself as a "bitcoin development company" and a permanent holder of the cryptocurrency with an ability to manage its balance sheet to add to its holdings.

The company rolled out a metric this year called bitcoin "yield," which isn't a yield in the traditional sense. Rather, it measures the relationship between the company's Bitcoin holdings and shares outstanding.

"Our objective is to accumulate Bitcoin holdings at a faster rate than we issue shares, and we believe we have a demonstrated track record of doing so," said CEO Phong Le on a call to discuss the company's earnings in August.

Chairman and controlling shareholder Michael Saylor, a big believer in Bitcoin, has turned the company into the largest corporate holder in the world. It has more than 1% of the roughly 20 million Bitcoin outstanding. The company declined to comment to Barron's, citing the release of its earnings for the third quarter on Oct. 30.

While the company views itself as a permanent holder of Bitcoin, it would face taxes if it sold any of its stake now, notes New York tax expert Robert Willens. Its cost basis is around $39,000 per Bitcoin.

While the company talks about the benefits of leverage, debt can cut both ways. The stock was depressed in 2022, when Bitcoin prices were falling, and some of its convertible debt then traded for less than 50 cents on the dollar. Barron's wrote positively on those securities at the tim e.

Wall Street analysts tracked by Bloomberg are uniformly bullish, but some wrestle with the premium on the stock relative to the value of the company's Bitcoin.

The " voices of those who argue that the stock shouldn't be trading at such levels have grown louder," Benchmark analyst Mark Palmer wrote on Oct. 18. "Such observers agree that MSTR's share price should appreciate as the price of bitcoin rises inasmuch as most of the company's value is derived from the 252,220 bitcoins it held as of September 19, but they view a significant premium to the value of those holdings as unjustified."

Palmer disagrees, arguing that what determines what the company is worth isn't just the value of its coins, but its ability to use debt and stock issuance to increase the amount of Bitcoin it holds per share.

He has a Buy rating on the stock and a target of $245 for the price.

The bulls have been right on Bitcoin and MicroStrategy, but the stock looks like a pricey way to get exposure to the asset class now.

Write to Andrew Bary at andrew.bary@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

October 25, 2024 13:53 ET (17:53 GMT)

Copyright (c) 2024 Dow Jones & Company, Inc.