MSTR: The mother of all sh**cos.
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MSTR: The mother of all sh**cos.
Michael Saylor is a con artist who has used Bitcoin to pump the valuation of his stagnating, barely profitable business to absurd levels. There is huge downside IMO, even if BTC remains strong.
Disclaimer: The information contained in this article is not and should not be construed as investment advice. This is my investing journey and I simply share what I do and why I do that for educational and entertainment purposes. I try my best to be transparent about my positioning to the extent it is relevant to my posts. However, I reserve the right to close positions at any time without further notice.
Disclosure: I am short MSTR 0.00%↑ via derivatives.
Intro
Michael Saylor has a huge following. He is the messiah of the Bitcoin believers. In my opinion, he is nothing but a con artist who runs a decaying business which he is trying to cover up with his Bitcoin strategy. This has worked well for him so far. Excluding the Bitcoin holding, his stagnating & barely profitable legacy business is now trading at 8x revenues and 180x EBITDA, a huge increase from the time when the company had not yet adopted its Bitcoin strategy. Whether Bitcoin’s latest surge is sustainable or not is secondary, MicroStrategy MSTR 0.00%↑ stock has huge downside in my opinion. No mispricing is forever.
The Strategic Pivot
It all started on August 11, 2020, when MicroStrategy announced the adoption of Bitcoin as its primary treasury reserve asset. It was the beginning of the company’s transformation from a technology player to a Bitcoin holding vehicle.
Initially, they purchased 21,454 bitcoins just with their cash reserves which was the essence of their stated reserve asset strategy. But they did not stop there. They subsequently started raising debt and equity to increase their Bitcoin holdings. Today, the company owns 158,400 bitcoins with a total market value of $5.6bn.
In addition to depleting their cash reserves by $500m, this was financed by raising $2.3bn in debt and $2.2bn in equity. The residual of $600m is mostly their capital gains on Bitcoin. Operating cash flow has been negligible.
In conjunction with this journey, Michael Saylor has become a celebrity due to his intense preaching in mainstream and social media. His stock pumping has created more value than the business itself has ever created before. However, it’s doubtful whether that can be sustainable.
The Business
MicroStrategy used to be a plain enterprise software company. This is presumably one of the hottest industries of the 2010s and early 2020s with many players seeing huge growth rates. And MicroStrategy? At best, their revenues can be described as flat over the past decade:
And this stagnating business is not even generating decent profits. They operate this barely at breakeven.
With respect to enterprise software, we are possibly living in the most disruptive times ever. And here is a company, that’s neither growing nor meaningfully profitable. What could that possibly be worth? ‘Nothing’ is an answer that comes to mind.
And what are markets assigning to this? After its recent surge, the stock is trading at almost 8x revenues.
And 180x EBITDA:
To make sure there is no misunderstanding: This has been adjusted for Bitcoin. This is just MicroStrategy, the technology business.
Taking a sum-of-the-parts view, MicroStrategy can be valued by adding their leveraged Bitcoin investment to their business value. I have plotted that in the chart below:
MicroStrategy’s Bitcoin holding minus their net debt is currently worth $240 per share. That’s not even half of the current share price of $510. The remaining $270 (equivalent to $4bn in market value) is supposed to be carried by the revenue and EBITDA stream plotted earlier.
The valuation of the legacy business (excl. net cash) was hovering at about $900bn in 2018 and 2019. This means, the value assigned to the business has more than quadrupled since the adoption of the Bitcoin strategy. Michael Saylor has created $3bn out of thin air by doing (admittedly very entertaining) interviews like this:
I have heard MicroStrategy bulls claiming that the company is like an ETF without management fee. How absurd is that? There is a management fee. It is the dead company weight. And that can deflate to zero anytime.
I would be comfortable shorting this even as a Bitcoin bull, possibly by hedging it with a long Bitcoin investment. But coincidentally, I happen to be a Bitcoin skeptic. To understand where I am coming from, let’s visit the bull case for Bitcoin.
The case for Bitcoin
There are of course nuances to the Bitcoin bull case, for example with respect to technology adoption, but for maximalists like Michael Saylor, the entire thesis typically boils down to Bitcoin’s scarcity which supposedly makes it a superior store of value.
My counter to that assertation is this: If they want to buy it for its ability to cost effectively and conveniently store value, why would they not buy the S&P instead?
Quality stocks are just as deflationary as certain cryptocurrencies and the accumulation/compounding of deflationary assets is the ultimate goal of wealth management. Shares will be burned in buybacks at a higher pace than new shares will be issued. There will be less Apple and Microsoft shares in the future, while there will be more Dollars and Euros. The purchasing power of an Apple or Microsoft share will increase.
A Bitcoin maxi might object that Bitcoin has its scarcity built in by nature whereas the next CEO of Apple can always screw investors over. Apple’s shareholders have to trust that this won’t happen. Bitcoiners view that as a weakness. But investing always requires trust. Bitcoin is not immune to that. A Bitcoiner has to trust that future investors will have at least the same affection for Bitcoin as present investors. How is that in any way a less risky assumption than assuming the next Apple CEO will have shareholders’ interests at heart?
From a monetary perspective, quality stocks are backed by the power the underlying companies have on our lives. If that power increases, the shares become more valuable and vice versa. So, quality stocks refer to companies with superior power on our decisions, i.e. those with very low customer bargaining power. Think about companies like Google or Costco or more broadly the S&P.
The S&P is the most liquid basket of deflationary assets the world has ever seen. You might say, ‘well if the financial system fails, I will still have my Bitcoin’. But imagine a world in which the S&P fails. It will be such a vast destruction of value that I have difficulties to envision how much purchasing power could be left in any digital asset. And even if it provides much desired freedom and protection from government overreach (a desire I share 100%), if you want to benefit from the advancements of humanity, you will have to play by the rules to some degree anyway. Otherwise, you will have to move somewhere into the woods to live a self-sustained life. In which case the use case for a crypto wallet is also massively compromised.
Goldbugs and Cryptobros appear to have this remarkable aversion against productive assets as a store of value. To some degree it is understandable. If an asset is productive, it is doing something by definition. And if it does something, it can fail doing that. And then it loses its value. Would it not be nice to have an unproductive asset carrying value? It can’t fail, it can’t disappoint. I believe this peace of mind that it cannot fail because it is not doing anything to begin with is a bug, not a feature. And the investor/saver will ultimately pay for this bug with underperformance vs. productive assets.
Summary
There is one risk to the bear case that I deem warranted. It’s the risk that one might end up in a biblical melt-up. There are fantastical price targets floating around in the Bitcoin community. The upside of Bitcoin in its ultra bull case scenario is unquantifiable which makes betting against it an act of madness.
Perhaps I am mad, but I don’t consider this risk unreasonable. There is a huge margin of safety baked in for me given the absurd valuation of MicroStrategy’s legacy business. Additionally, I consider Bitcoin a monetary asset. It will perform well when the rest of my portfolio will also perform well.
There is no certainty in investing. It’s always a game of odds. I consider owning MicroStrategy the equivalent of going all in with 2 and 7 in poker. It’s absolutely possible to come out as a winner. But whether or not that happens, it was a gamble against the odds.
Sincerely,
Your Fallacy Alarm
MSTR: The mother of all sh**cos.
Hi, I believe you bought put spread, and did not sell calls...right? Did tiu use leaps for that?
I don't know whether he's a con artist, but Michael Saylor has no understanding of the economics of Bitcoin mining/validation. He recently claimed that an ETF and the block reward halving will be bullish for BTC.
Anything can happen short-term, but the 4-year schedule of block reward halvings is anything but bullish. The network would not exist if miners didn't validate transactions and create new blocks. They earn revenue from transaction fees and from the block reward. So as the block reward declines, either the price of Bitcoin has to increase, or revenue from transaction fees has to rise. I find the assumption that price can/will double every 4 years to be unrealistically optimistic, so I believe the only way mining remains profitable is through an increase in transaction fees. The problem with BTC, is that the size of blocks has been limited to 1MB, which limits the number of transactions that can fit in a block. So for fee revenue to rise, the cost of fees also needs to rise. Will users of the network be prepared to pay higher and higher fees to make transactions, because if they don't then mining will once again become unprofitable. I also find this hard to believe, and it certainly isn't the network ("a peer-to-peer electronic cash system") as described by its inventor in the White Paper. So for me, the mining economics of BTC do not support Michael Saylor's bullish vision and it seems inevitable that unless major changes are made to the Bitcoin code, the dollar value of MSTR's BTC holding will eventually drop.
In sum, unless we see an exponential increase in use to offset the halving of block rewards there is no incentive for miners to continue validating the network. What is BTC being used for other than speculation? This is unfortunate, because alternative versions of Bitcoin, like Bitcoin SV, where the block size in unlimited and where Bitcoin's scripting language has been re-activated, have lots of interesting use cases: micropayments as an alterntive to advertising on the Internet, tracability of supply chains on the blockchain, triple-entry accounting, electronic ticketing (NFTs) to name just a few.