Microstrategy and the Bitcoin Craze – Insider Weekends

Key Insights:

• Microstrategy was founded in 1989 as a business software solutions company, but starting in August 2020, began to purchase large amounts of Bitcoin.
• The company now calls itself a “Bitcoin Development Company” – where the sole goal is to acquire more Bitcoin and further develop the Bitcoin network.
• Microstrategy funds its purchases of Bitcoin primarily through stock offerings and other debt offerings like convertible bonds and notes. In the first half of March 2024 alone, the company announced two separate debt offerings totaling $1.1 billion.
• Microstrategy now owns approximately 190,000 Bitcoin – which has a market value of approximately $13 billion, meaning the software solutions business is grossly overvalued and the company trades at a large premium to its Bitcoin holdings.
• This premium and overvaluation may be the reason founder and Executive Chairman Michael J. Saylor has been selling shares since January 2024, marking his first transactions in well over a decade.
• While we find the cryptocurrency situation in relation to Microstrategy fascinating, short interest in the company is a high 20%, and we don’t see ourselves taking either a long or short position in the company for the time being.
• Enterprising investors that are willing to go out on the risk spectrum could consider a long Bitcoin and short Microstrategy pair trade.

Microstrategy Inc. (MSTR): $1,782.36

Market Cap: $30.24B

Enterprise Value: $32.45B

How has a business software solutions company that sees no revenue growth and constantly flips from profitable to unprofitable run up over 565% in the last year? Bitcoin.

Microstrategy (MSTR) was founded in 1989 by Michael J. Saylor, Sanju Bansal, and Thomas Spahr as a data mining and business intelligence software company. As the years went by, Microstrategy broadened its business horizons and now offers a range of business software solutions – AI powered analytics, direct business consulting services, and more. But the financial results of these business operations are unremarkable, to say the least.

In the fourth quarter of fiscal 2023 (ended December 31, 2023), total revenues totaled $124.5 million – a decrease of 6.1% compared to Q4 2022. The company recorded an operating loss of $42.8 million and a net income of $89.1 million (due to tax benefits and gains on sales of assets) – which was slightly better than Q4 2022’s operating loss of $193.7 million and net loss of $249.7 million. Looking at our graph of Microstrategy’s income statement over the last few quarters, we see no consistent trend – revenue remains relatively flat, while net income flips from profitable to unprofitable, a disappointing look for any company.

But the reason that Microstrategy’s stock continues to skyrocket has more to do with the company’s digital assets or Bitcoin reserves. In August 2020, Microstrategy purchased $250 million worth of Bitcoin, with Micheal J. Saylor (then CEO, now Executive Chairman) claiming that Bitcoin was stronger than cash and the weakening U.S. dollar. Over the years, Microstrategy has rapidly increased its Bitcoin ownership – essentially turning the company into a Bitcoin proxy. Investors are especially excited by the fact that the company acts like a Bitcoin multiplier – the price of Bitcoin has risen by around 150% in the last year, while Microstrategy’s price has run up by over 565%.

The company funds its purchases of Bitcoin primarily through stock offerings and other debt offerings like convertible bonds and notes. In the first half of March 2024 alone, the company has planned two separate debt offerings – the most recent one being announced on March 14th. As part of this offering, Microstrategy plans to sell $500 million in convertible notes due in 2031 to institutional investors, adding to their $600 million offering announced on March 5. In Q4 2023, the company purchased 30,555 Bitcoins for $1.2 billion using proceeds from similar offerings, which they deem capital markets activities, while 350 Bitcoins were purchased for $13.4 million using excess cash.

As of December 31, 2023, the company owned approximately 189,150 Bitcoins – which at the time had a market value of $8.045 billion, or a market price of approximately $42,531.41 per Bitcoin. As of February 5th, 2024, that number rose slightly to 190,000 Bitcoins – which using the current price of $68,438.60 per Bitcoin, means that their total Bitcoin holdings have a market value of approximately $13 billion.

Now this number is especially important, considering the company’s market cap of $30.24 billion. Subtracting the market value of the Bitcoin from the company’s market cap would mean the business software solutions business is valued at $17.23 billion. This valuation feels incredibly inflated, especially considering the software solutions business can only churn out around $124 million in revenue per quarter. Thus, the market driving Microstrategy’s price up despite the large premium it trades is especially surprising – considering the true value of the company’s Bitcoin holdings and software business.

Perhaps this overvaluation is what is causing Executive Chairman Michael J. Saylor to sell shares. While insiders tend to sell shares for a variety of reasons, and we normally find more weight in insider purchases, Mr. Saylor has consistently been selling shares of Microstrategy since January (as part of a 10b5-1 trading plan adopted in September 2023) and that gives us some pause regarding the company. These were the first sales of Microstrategy that Mr. Saylor made in well over a decade, as his last sale of Microstrategy’s stock was on Sep 04, 2012 – back when the company was trading at $73.20 a share. A Director also sold shares of Microstrategy this week, joining several other insiders (the CEO, CFO, General Counsel, CAO, and numerous other Directors) who have sold shares of the company in the last month.

We’ve never been interested in actively investing in cryptocurrency, and investing in Microstrategy as a Bitcoin proxy is certainly not for us either. The company has fully leaned into the cryptocurrency space, calling themselves a “Bitcoin Development Company” – where the sole goal is to acquire more Bitcoin and further develop the Bitcoin network. The issue is that Bitcoin, like all cryptocurrencies, has seen multiple bubbles over the last few years – where the stock price skyrockets for a few months and then immediately comes crashing down. If Microstrategy continues acting like a multiplier for Bitcoin, the moment Bitcoin prices begin to fall, the company will likely face deep trouble.

It’s unsurprising that short interest for the company is high – sitting at around 20% at the moment. For these reasons, we’ll neither be investing or shorting Microstrategy for the time being, but we still find the situation fascinating, and may check back in on the company once we see Bitcoin prices begin to fall once again.

Editor’s Note: Tamanna Suria contributed to this article.

Welcome to edition 725 of Insider Weekends. Insider buying decreased significantly with insiders purchasing $58.15 million of stock compared to $93.72 million in the week prior. Selling also decreased to $3.9 billion compared to $7.69 billion in the week prior.

Sell/Buy Ratio: The Insider Sell/Buy ratio is calculated by dividing the total insider sales in a given week by the total insider purchases that week. The adjusted ratio dropped notably to 67.07. In other words, insiders sold more than 67 times as much stock as they purchased. This week also, the Sell/Buy ratio was favorable, compared to the prior week when the ratio stood at 82.1.

Notable Insider Buys:

1. EchoStar Corp. (SATS): $13.57

Director James DeFranco acquired 110,000 shares of this communication services company, paying $13.48 per share for a total amount of $1.48 million.

You can view the list of recent insider transactions for EchoStar Corp. here.

2. Opko Health Inc (OPK): $0.89

CEO & Chairman Phillip Frost MD acquired 1,600,000 shares of this health care company, paying $0.92 per share for a total amount of $1.47 million. These shares were purchased indirectly by by Frost Gamma Investments Trust.

You can view the list of recent insider transactions for Opko Health Inc here.

3. Traeger Inc (COOK): $2.21

Chief Executive Officer Jeremy Andrus acquired 396,689 shares of this wood pellets fired grills manufacturer, paying $2.35 per share for a total amount of $933,006. Mr. Andrus increased his stake by 5.82% to 7,210,564 shares with this purchase.

You can view the list of recent insider transactions for Traeger Inc here.

4. Lions Gate Entertainment Corp. Class B (LGF.B): $8.96

Chief Executive Officer Jon Feltheimer acquired 100,000 shares of this entertainment company, paying $8.84 per share for a total amount of $884,000. Mr. Feltheimer increased his stake by 5.03% to 2.09 million shares with this purchase.

You can view the list of recent insider transactions for Lions Gate Entertainment Corp. Class B here.

5. Geo Group, Inc. (GEO): $13.15

Executive Chairman George C. Zoley acquired 50,000 shares of this private prisons company, paying $12.48 per share for a total amount of $624,025. Mr. Zoley increased his stake by 1.37% to 3.7 million shares with this purchase.

You can view the list of recent insider transactions for Geo Group, Inc. here.

You can view the full list of purchases from this Insider Buying page.

Notable Insider Sales:

1. Meta Platforms Inc. (META): $484.1

Shares of META were sold by 3 insiders:

• COB and CEO Mark Zuckerberg sold 387,060 shares for $499.49, generating $193.33 million from the sale. A majority of these shares were sold through the Chan Zuckerberg Initiative Foundation.
• Chief Legal Officer Jennifer Newstead sold 585 shares for $493.75, generating $288,844 from the sale.
• Chief Operating Officer Javier Olivan sold 490 shares for $513.32, generating $251,527 from the sale.

You can view the list of recent insider transactions for Meta Platforms Inc. here.

2. Palantir Technologies Inc. (PLTR): $23.49

Director Peter Thiel sold 7,044,756 shares of this software company for $24.79, generating $174.62 million from the sale. These shares were sold indirectly by Rivendell 7 LLC.

You can view the list of recent insider transactions for Palantir Technologies Inc. here.

3. NAPCO Security Technologies Inc (NSSC): $39

Shares of this electronic security devices company were sold by 2 insiders:

• Pres, CEO, Chairman, Secy Richard Soloway sold 2,000,000 shares for $40.75, generating $81.50 million from the sale.
• Executive Vice President Kevin S. Buchel sold 50,000 shares for $40.36, generating $2.02 million from the sale.

You can view the list of recent insider transactions for NAPCO Security Technologies Inc here.

4. Microstrategy Inc. (MSTR): $1,782.36

Shares of this software company were sold by 2 insiders:

• Executive Chairman Michael J. Saylor sold 27,575 shares for $1,589.72, generating $43.04 million from the sale.
• Director Jarrod M. Patten sold 2,575 shares for $1,526.88, generating $3.93 million from the sale.

You can view the list of recent insider transactions for Microstrategy Inc. here.

5. Advanced Micro Devices Inc. (AMD): $191.06

Shares of AMD were sold by 2 insiders:

• Chair, President & CEO Lisa T. Su sold 125,000 shares for $195.13, generating $24.39 million from the sale.
• SVP Harry A. Wolin sold 32,789 shares for $212.31, generating $6.96 million from the sale. These shares were sold as a result of exercising options immediately prior to the sale.

You can view the list of recent insider transactions for Advanced Micro Devices Inc. here.

You can view the full list of sales from this Insider Sales page.

The list of all insider purchases and sales by management people is only available to InsideArbitrage Premium and Plus members.