VALUING MICROSTRATEGY IN BITCOIN
A glimpse at what MicroStrategy could be worth given various scenarios relating to the bitcoin price.
This article will explore:
a) How we might discern the value of MicroStrategy (MSTR), a company in a fairly unique situation in the space, as well as the basics of how value investors operate.
b) Whether or not, given that MSTR is so heavily invested in bitcoin, the main opportunity cost of investing in MSTR is owning an equivalent amount of bitcoin. Hence, why it now makes more sense to value it in bitcoin than in dollars. The explanation is followed by some rough attempts to do just that!
c) Why the approach of pricing in bitcoin might become more and more relevant in the future.
As is well known, MSTR is a company which now has significant skin in the Bitcoin game. In August 2020 it was announced that they were adopting Bitcoin as their primary treasury reserve asset. They converted their entire corporate treasury into bitcoin and have continued to convert free cashflows into bitcoin since. There were also two convertible debt issues to follow, the proceeds of which were also fully converted to bitcoin. Most recently in June 2021, there was further non convertible debt issued, using the proceeds to purchase yet more bitcoin.
Some numbers for context. As of the time of this writing (August 5, 2021):
MicroStrategy HODLs 105,085 BTC worth a total of approx $4.1B (purchased at an average price of $26,080 per coin). The MSTR share price is currently $666, with a total company value of approx $6.5B. Their situation is unparalleled amongst other companies in terms of both:
their bitcoin holdings as a percentage of their company value or market cap
the overall size of the company.
In other words, other large companies (such as Tesla) hold much smaller percentages of bitcoin relative to company size, whereas other high percentage holders are simply far smaller in size.
These numbers can be seen at the following chart of bitcoin treasuries in publicly traded and private companies.
Starting around August of 2020, we began to see bitcoin being added to the balance sheets of public companies. One such company is MSTR. This is why you often hear MSTR described as a proxy Bitcoin ETF. However, it’s a more dynamic situation than that due to their likely ongoing BTC buys in the future. Hence why I’m looking at how a traditional value investor might value them.
TRADITIONAL DOLLAR-BASED VALUATION
First, the way the market will mainly be valuing MSTR is in dollar terms. After all, the share price is priced in dollars and profits are made in dollars.
For those unfamiliar, I’m going to explain how this type of valuation might be formed step by step.
MSTR makes fairly stable profits and have not grown significantly in recent years.. The most conventional way of valuing a company like this is to sum up the present value of all of estimated future profits, and then to add in any other relevant assets aside from this, like bitcoin.
What do we mean by present value? $100 received in 10 years time is not as valuable as $100 right now , so we need to discount future profits by an interest rate to derive the value now.
For example, we might value $100 in 10 years as: $100 / 1.0122 ^ 10 = $88.60