MicroStrategy bet on Bitcoin turned out to be a losing bet

micro . strategy

MSTR
It embarked on the strategy of using cash and then debt to purchase alternative assets when it announced its June 2020 quarterly results on July 28, 2020. In the roughly two years since then, it has purchased 129,218 bitcoins as of May 2, 2022, in the March 2022 10-Q file. The company spent just under $4 billion at an average cost of $30,700.

Unfortunately, since last Thursday, May 12, Bitcoin has been trading at just over $2000 at MicroStrategy’s breakeven price of $30,700 and has reached $26,350. The recent decline in the price of Bitcoin (more than $10,000 or 26% in the last month), driven by an increase in interest rates and a more prevalent risk-off environment, has also affected the company’s stock price (it’s down more than $250 or 56% in the last month) ).

roller coaster ride

One point to keep in mind is that even while MicroStrategy’s stock fell more than 25% last Wednesday to $168.20 (but rebounded to $204.57 by Friday), it’s down 62% this year and is 84% ​​off its all-time high. At $1,272.94 on February 9, 2021, shares are up 67% from $122.74, the day after the company announced its initial crypto purchase.

As shown in the chart below from StockCharts.com, stocks rose rapidly and then fell rapidly by early 2021. It settled in a wide range from about $500 to $800 from March 2021 to January 2022. The range then decreased to $300 to $500 For most of this year until last week it fell over $100 in just over a week.

For every $100 Bitcoin falls, it takes only $1.14 of MicroStrategy’s stock value, but for every $1000 it can affect the stock by $11.45, and if bitcoin drops $10,000, it can wipe out $114 of MicroStrategy’s stock value. And remember, it’s down from a high of $68,790 on November 10 last year.

As can be seen in the chart below from StockCharts.com, MicroStrategy’s stock price reflects Bitcoin’s price movement.

Share price without bitcoin

One can calculate how much Bitcoin’s value is embedded in a company’s stock price by taking the number of times the Bitcoin price minus the debt associated with it. While that’s a moving number as bitcoin trades 24 hours a day, as of the stock market close on Friday, May 13, according to Yahoo! The fund was traded at $29,283.10.

MicroStrategy stock closed at $204.57. This is the calculation to determine the value of a company’s stock without Bitcoin.

  • Bitcoin price is $29283.10
  • Double the number of bitcoins 129,218
  • MicroStrategy’s Bitcoin Is Worth $3.78 Billion
  • Total debt is $2.36 billion
  • Bitcoin net worth $1.42 billion
  • MicroStrategy share price from $204.57
  • times the number of shares 11.289 million
  • Market value is $2.3 billion
  • Minus Bitcoin’s value of $1.42 billion
  • The market value is $887 million
  • Or $78.60 per share

MicroStrategy’s stock value depends on its earnings

Hey ho! Finance has MicroStrategy EPS at $3.85 and $3.90 for 2022 and 2023, respectively. This would make the P/E ratio of 20.4x and 20.2x, respectively, for those years based on $78.60 per share. For a low growth company like this, the valuation level is high with the S&P 500 trading at a forward P/E rate of 16.6x per FactSet, although it’s not completely out of line.

Bitcoin at $18278 is a significant number for MicroStrategy

MicroStrategy took on $2.36 billion in debt to buy Bitcoins, along with using more than $300 million in cash on its June 2020 balance sheet and the free cash flow it’s generated since then. The total amount spent on 129,218 Bitcoins is $3.97 billion with an average price of $30,700.

While it should drop more than $10,000 to reach $18278, if it did the company’s bitcoins would equalize debt. And if it falls, MicroStrategy’s bitcoins will be worth less than the debt.

Bitcoin can offer a lot of upside

There is a scenario where Bitcoin returns to $40,000, $50,000 or even above its previous high of $68,789. In these cases, MicroStrategy’s stock will follow in the bitcoin price rise. The investor needs to understand the downside that comes along with the upside of MicroStrategy, which depends entirely on Bitcoin price movements.

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