Reflexivity has been MicroStrategy’s secret sauce. The company prints equity or equity-linked securities to buy bitcoin, boosting bitcoin’s price, which in turn inflates MicroStrategy valuation. This allows it to issue more stock and repeat the cycle.
This MonoStrategy has enabled MicroStrategy to acquire 2.25 per cent of all bitcoin in existence, a hoard worth around $46bn at current prices. The company trades at nearly double the value of its underlying bitcoin holdings, a testament to belief of some investors in Michael Saylor’s project.
However, MicroStrategy’s shares have now fallen for nine of the past 10 trading sessions. The wobble suggests that despite the arrival of the most crypto-friendly administration in American history, there may be limits to this strategy.
Not that Saylor is giving up. The latest fundraising gambit — a $584mn issue of perpetual convertible preferred stock — attempts to push the limits even further.
Dubbed STRK, this hybrid security carries an 8 per cent dividend, payable in cash or stock at MicroStrategy’s discretion, and can be converted into common equity at $1,000 per shares, or around three times the current stock price.
(For some inexplicable reason, the instrument was sold at a 20 per cent discount to the liquidation preference of $100 per STRK, generating a lot of confusion, with some media outlets such as Barron’s saying the yield is 10 per cent as a result.)
It’s an ungainly, unconventional financial contraption: structurally subordinated to $6bn of existing convertible bonds, yet senior to common equity, and featuring a deeply out-of-the-money call option of infinite duration.
The bond floor and option are difficult to model, and unsurprisingly, institutional investors have given it a wide berth. Even with Barclays as lead underwriter, most professionals prefer the relatively straightforward convertible bonds.
But Wall Street’s apathy is beside the point. STRK’s audience lies elsewhere.
Saylor has framed the offering as an appeal to “a new class of investor”, which, in practice, means retail buyers. STRK, available via Fidelity’s platform, boasts a yield far richer than the sub-6 per cent typically offered by boring bank preferreds and the tantalising prospect of Qualified Dividend tax treatment (though uncertainty abounds — caveat investor, and we are giving no tax advice).
Barron’s, the go-to financial publication for Main Street investors, has endorsed it. “Retail investors generally don’t buy based on models,” it writes, recognising that institutions would find the instrument unappealing.
Indeed, faith in Saylor — bolstered by his frequent social media proclamations and AI-enhanced images of himself as a digital-age superhero — has proven a more powerful force than TradFi analysis.
For MicroStrategy, STRK represents a new avenue to keep printing equity-linked paper while its stock is still trading at a premium to net asset value. But its implications for common stockholders are less rosy.
Michael Saylor has said that he wants to “build more intelligent leverage for the benefit of our common stock shareholders.” In reality, the new security dilutes their stake while pushing them further down the capital structure.
If the company lacks cash to pay the dividends, it can simply issue more stock, meaning dilution compounds over time. In effect, STRK resembles a permanent PIK (payment-in-kind) instrument with a never-expiring out-of-the-money call option, coiled up with potentially explosive dilution.
This compounding dilution is almost inevitable, given how MicroStrategy will struggle to make the dividends in cash.
The legacy software business loses money, and bitcoin generates no cash flow. Dividend payment would require (1) paying the dividend in the form of more shares, (2) selling new shares, or (3) liquidating some of its bitcoin stash, each option fraught with its own complications. Meanwhile, the conversion price of $1,000 per share is essentially a moonshot gamble on bitcoin’s continued rise.
STRK provides MicroStrategy with both permanent capital and a licence to print shares at will. As long as the stock trades at a premium to its bitcoin holdings, the company can keep issuing novel securities and finding new buyers. Meanwhile, with MicroStrategy comprising a sizeable portion of crypto inflows (28 per cent in 2024, according to JPMorgan), it has helped sustain bitcoin’s ascent.
This might keep the music playing long enough for bitcoin enthusiasts to lobby the US government to adopt the asset as a strategic reserve or, more prosaically, for insiders to cash out at a favourable price.
Yet even the most charismatic storytelling eventually encounters the gravitational pull of fundamentals.
Bill Ackman learned this lesson last summer when, despite drumming up over $1bn in retail orders, he failed to attract sufficient institutional support for his Pershing Square USA vehicle. To his credit, he opted to scrap the deal rather than jam it into individual investors.
On 22 November, MicroStrategy closed at an all-time high of $421.88, while bitcoin surged to $98,998. Bloomberg called its strategy an “infinite money glitch” at the time and CEO Michael Saylor celebrated with more hype.
Since then, bitcoin has slipped slightly to $96,922 at pixel time, while MicroStrategy has tumbled nearly 40 per cent. In the meantime, MicroStrategy’s freshly minted $3bn convertible bond, issued mere days before that November all-time-high, now trades 12 per cent below par. For a self-proclaimed “Bitcoin Treasury Company,” the divergence is peculiar.
MicroStrategy has managed to sell its latest brainchild, but the common stock’s underperformance versus bitcoin suggests the first crack in Saylor’s grand narrative. It will test how long and by how much a cult of personality can stay untethered to financial reality.
https://www.ft.com/content/b783ddd9-b8f2-4ac0-874c-89e0153ca6c3
