Technique (NASDAQ: MSTR), the SaaS-based enterprise intelligence firm previously referred to as MicroStrategy that pioneered a bitcoin treasury technique, is at present buying and selling at a $73 billion market cap, ~1.6x the worth of its underlying bitcoin holdings. This so-called “MSTR premium” has induced a lot misunderstanding, wholesome skepticism and even consternation, however with a decade of deep equities expertise, we imagine that there are three the reason why the MSTR premium is justified. These are significantly legitimate during times of rising bitcoin value expectations, as we’re in now.
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CHART: MSTR’s premium to NAV
Supply: MSTR-Tracker.com, GSR
First, Technique takes on leverage by issuing fairness and debt to speculate the proceeds into bitcoin, incomes the distinction between the return on bitcoin and its price of capital (ie. “carry”). Importantly, Technique earns this carry not simply this yr, but in addition in future years as effectively, and traders merely present-value this anticipated future carry and embrace it in MSTR’s market cap.
Actually, this can be a main motive why MSTR’s premium will fluctuate with market expectations of future bitcoin returns. Nonetheless, the primary motive MSTR trades at a premium to its BTC holdings is that traders pull future BTC carry to the current.
Second, Technique monetizes clever capital markets issuance for the advantage of shareholders. It accretes worth by way of convertible debt issuance, the place it not solely will get paid to supply bitcoin-like returns to the bond market, but in addition for the volatility inherent in its inventory as convertible bond arbitrageurs make more cash with a extra risky underlying asset. As well as, MSTR points fairness, largely by at-the-money fairness issuance applications, at a premium to ebook worth, which is by definition accretive to shareholders. Actually, issuing fairness at twice ebook worth is tantamount to promoting $1 for $2, or conversely, shopping for BTC at 50% off. That is how Technique was in a position to generate a 74% improve within the quantity of its bitcoin held per share final yr, equal to 140,630 BTC, or $14 billion of worth for shareholders.
Lastly, your entire assemble takes benefit of bitcoin and crypto’s nascency, the truth that cryptocurrencies are in secular growth and that bitcoin’s value has tended to rise over time.
For these not but satisfied, we provide the next thought experiment: If I had a magic checking account with $100 USD in it that paid you a 69% rate of interest, how a lot cash would you pay me for that? Whereas the reply could fluctuate from individual to individual, it’s possible way more than $100, that means that the checking account would commerce at a premium to its underlying USD (i.e. NAV).
That is precisely what is going on with MSTR, because it has elevated its BTC per share at a 69% annual fee because it started investing in bitcoin in August 2020. This improve in BTC per share (i.e. in-kind yield) is increased throughout bull markets and decrease throughout bear markets, however it has usually risen over time. And whereas there isn’t any assure that Technique will proceed to extend its BTC per share sooner or later, MSTR is guiding for a 15%+ improve this yr and 6-10% in every of the next two years.
Dangers abound, in fact — MSTR traders tackle foundation danger to the value of BTC and the inventory tends to maneuver greater than bitcoin in each instructions. Relatedly, the premium could transfer up or down sooner or later, and the inventory will possible commerce at a reduction (i.e., under the worth of its bitcoin holdings) throughout bear markets. However the premium exists as a result of traders imagine MSTR will proceed to extend the quantity of its bitcoin per share sooner or later, and they’re keen to pay up for that now.
CHART: MSTR’s improve in bitcoin per share (i.e. bitcoin yield)
Supply: MSTR-Tracker.com, GSR