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Taking a Speculation on MSTR

Analysing companies' finances and value from their financial statements using ratios and formulae
Hornblower
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Taking a Speculation on MSTR

#504476

Postby Hornblower » June 2nd, 2022, 5:57 pm

Microstrategy provides 'enterprise analytics' to businesses.

excuse the long narrative, I'm trying to give context.
The company has been trading for years, certainly not a growth stock, but consistently earning around $500 million a year in revenue, and making around $50M in profit annually. They had been ticking along, retaining profits as they went until there was $500M + sitting in cash.

Around 2020 the CEO, Michael Saylor (the longest serving tech CEO in the NASDAQ apparently), became increasingly concerned about the inflation he could see coming down the line that was going to decimate the $500 million over time. (good timing, eh?) Long story short, he decided Bitcoin was the the thing to use to preserve company wealth. After putting it to a vote, and offering to buy out any shareholders that disagreed with the action, he started buying Bitcoin aggressively. He then doubled down and borrowed on the bond market several times at attractive rates & bought more Bitcoin. He also issued new shares & purchased more Bitcoin with the proceeds. A man of conviction.

MSTR stock soared as Bitcoin pumped up to $69,000 in 2021. The shares, which had been trading for around $150-165 for several years shot up to highs of $1034. Then we entered a Bitcoin bear market and the price collapsed again. Today we are sitting about $250 a share.

What interests me in this company as a speculation is: Its core earnings are unchanged, that steady engine continues....$500M in revenue, $50M in profit...BUT, they now also own 129,218 Bitcoin. This is worth $3.876 BILLION last time I checked. The entire market Cap of MSTR is only $2.69 BILLION.

We have a profitable, steady business sitting at the same market cap that it had a couple of years ago...but with $3.876 B in new assets attached to it.
A profitable company trading below book value doesn't come up very often.

IF (big if) Bitcoin starts grinding up in price, MSTR will probably act as a leveraged play on this as it did in 2021. If Bitcoin has a multi-year bear market, I'd expect the board to start forcing Saylor to liquidate some of the holdings and return the money to the treasury.

I think the risk/reward to this speculation is very favourable.

Disclaimer: I bought MSTR a few weeks ago at $235.67 a share. Todays price is $247.32.

Itsallaguess
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Re: Taking a Speculation on MSTR

#504479

Postby Itsallaguess » June 2nd, 2022, 6:10 pm

Hornblower wrote:
Microstrategy provides 'enterprise analytics' to businesses.

Around 2020 the CEO, Michael Saylor (the longest serving tech CEO in the NASDAQ apparently), became increasingly concerned about the inflation he could see coming down the line that was going to decimate the $500 million over time. (good timing, eh?) Long story short, he decided Bitcoin was the the thing to use to preserve company wealth.

After putting it to a vote, and offering to buy out any shareholders that disagreed with the action, he started buying Bitcoin aggressively. He then doubled down and borrowed on the bond market several times at attractive rates & bought more Bitcoin. He also issued new shares & purchased more Bitcoin with the proceeds. A man of conviction.

MSTR stock soared as Bitcoin pumped up to $69,000 in 2021. The shares, which had been trading for around $150-165 for several years shot up to highs of $1034.

Then we entered a Bitcoin bear market and the price collapsed again. Today we are sitting about $250 a share.


Are you not taking two risks here though?

1. Bitcoin doesn't recover, or even goes further south...

2. An off-piste CEO decides to do something else risky with business capital, rather than sticking to the knitting...

Are you properly taking into account the potential for other CEO-based actions that put the underlying business and share-price at risk?

Cheers,

Itsallaguess

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Re: Taking a Speculation on MSTR

#504480

Postby Hornblower » June 2nd, 2022, 6:30 pm

This is a speculation, not a 'buy & forget' stock. Saying that, I have a friend who has MSTR in his retirement account. But in this context, I see this as a speculation that will hopefully play out over 3 or 6 months.

IMO you could have negative sentiment towards Bitcoin & this speculation still makes sense.

1. Yes, Bitcoin could decrease in price further. It's an unknowable you'd have to attach your own estimates to. Even if you estimate the chance of Bitcoin going to 0 within the year was 20%, this speculation would still probably make sense with a certain amount of a portfolio.

2. Off-piste or visionary CEO? He was seeing the inflation coming clearly several years ago. Now this week we have Janet Yellen apologising saying 'we didn't predict that this was going to happen'. His last big bet was back in 2012 when he published a book called The Mobile Wave and recommended that everyone buy the software & Social Media companies that have eaten the world over the past decade. He did rather well from those investments.

H

Itsallaguess
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Re: Taking a Speculation on MSTR

#504482

Postby Itsallaguess » June 2nd, 2022, 6:34 pm

Hornblower wrote:
Off-piste or visionary CEO?

He was seeing the inflation coming clearly several years ago.

Now this week we have Janet Yellen apologising saying 'we didn't predict that this was going to happen'.

His last big bet was back in 2012 when he published a book called The Mobile Wave and recommended that everyone buy the software & Social Media companies that have eaten the world over the past decade. He did rather well from those investments.


But it's one thing to see something coming like inflation that needs dealing with, and then it's another thing as to how that issue is dealt with...

You've used the words 'his last big bet', and all I was pointing out was that you're not only buying into an investment case that might rely on the Bitcoin valuation changing positively, but also potentially hitching a ride on someone's 'next big bet' at the same time, and I wondered if you were properly acknowledging that separate CEO-based risk in your investment case here, that's all...

Cheers,

Itsallaguess

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Re: Taking a Speculation on MSTR

#504485

Postby Hornblower » June 2nd, 2022, 6:51 pm

But it's one thing to see something coming like inflation that needs dealing with, and then it's another thing as to how that issue is dealt with...


Yes, quite. There's a lot of hours of Saylor laying out his arguments why he believes Bitcoin is the best inflation hedge he can find. I can't post links here, but his Lex Fridman interview is great, as is his one titled 'Masterclass in Economic Calculation', as is the 'Saylor Series' with Robert Breedlove.

You've used the words 'his last big bet', and all I was pointing out was that you're not only buying into an investment case that might rely on the Bitcoin valuation changing positively, but also potentially hitching a ride on someone's 'next big bet' at the same time, and I wondered if you were properly acknowledging that separate CEO-based risk in your investment case here, that's all...[/i]

Yes, that's why I'm defining this as a 'speculation' deliberately. If Bitcoin price stayed steady for the next 3 years, I'd still expect the MSTR share price to be re-valued upwards as the market becomes aware that it's trading below book value. The downside is protected by the fact that MSTR is trading at around it's long term market Cap and earns it's revenue from offering 'enterprise analytics.' The market is pricing the stock as if the Bitcoin has already crashed close to zero.

H

Itsallaguess
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Re: Taking a Speculation on MSTR

#504488

Postby Itsallaguess » June 2nd, 2022, 6:55 pm

Hornblower wrote:
Yes, that's why I'm defining this as a 'speculation' deliberately.

If Bitcoin price stayed steady for the next 3 years, I'd still expect the MSTR share price to be re-valued upwards as the market becomes aware that it's trading below book value.

The downside is protected by the fact that MSTR is trading at around it's long term market Cap and earns it's revenue from offering 'enterprise analytics.'


If there was any downside protection in the underlying business, why did the CEO have to take a number of speculative risks to protect it against inflation?

Hornblower wrote:
The market is pricing the stock as if the Bitcoin has already crashed close to zero.


Maybe the market is pricing the stock to take account of the CEO's recent off-piste history, and the potential for additional future risk-taking...

Cheers,

Itsallaguess

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Re: Taking a Speculation on MSTR

#504490

Postby Hornblower » June 2nd, 2022, 7:09 pm

If there was any downside protection in the underlying business, why did the CEO have to take a number of speculative risks to protect it against inflation?


As I explained in the initial post, the CEO found Bitcoin while searching for a way to preserve the value of his $500 MILLION cash pile, rather than seeing it being inflated away. A 'melting ice cube' was how he described it. Presumably the underlying business is going to have to increase their prices in the high inflationary environment, along with every single other business.


Maybe the market is pricing the stock to take account of the CEO's recent off-piste history, and the potential for additional future risk-taking...


The chart tells a different story. The market LOVED his strategy when Bitcoin was going up. As I said in my initial post, the share price soared from around $140-150 to $1034 back in the massive Bitcoin run up in 2021, then crashed as Bitcoin has declined in price over the past year. Lay the charts over each other and they are closely correlated (as you'd expect). So to my mind the recent price is an emotionally based one.

He's clearly told the market what he intends to do, keep buying Bitcoin with his Free Cash Flow. He's very transparent about his intended strategy.


H

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Re: Taking a Speculation on MSTR

#504491

Postby Hornblower » June 2nd, 2022, 7:13 pm

If it would help, think of the Bitcoin as the company treasury holding large quantities of a volatile commodity that they believe is going to preserve value better than leaving their reserves in cash. Instead of $3.876 BILLION in Bitcoin, think of it as $3.876 BILLION of silver, or tungsten.

H

Itsallaguess
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Re: Taking a Speculation on MSTR

#504503

Postby Itsallaguess » June 2nd, 2022, 8:53 pm

Hornblower wrote:
If it would help, think of the Bitcoin as the company treasury holding large quantities of a volatile commodity that they believe is going to preserve value better than leaving their reserves in cash. Instead of $3.876 BILLION in Bitcoin, think of it as $3.876 BILLION of silver, or tungsten.


No, it's OK thanks.

I can see why *you* might want to think of it like that, and want to perhaps try to explain it like that, but I'm happy to continue applying a lot more scepticism than that, thanks...

Good luck with your investment.

Cheers,

Itsallaguess

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Re: Taking a Speculation on MSTR

#504505

Postby Hornblower » June 2nd, 2022, 9:04 pm

Thank you.

It'll be interesting to see how the speculation plays out. I'll report back at the 3 month point.

H

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Re: Taking a Speculation on MSTR

#505317

Postby murraypaul » June 6th, 2022, 1:21 pm

The problem is that it is appealing to two totally different sorts of investors:
a) Those that want a steady-as-she goes business that apparently doesn't see massive room for growth, as it couldn't find a profitable use for $500M in cash
b) Those that want to speculate on the price of Bitcoin
I can't imagine the overlap between those two groups is huge, which is why the company is valued at less than the sum of its parts.

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Re: Taking a Speculation on MSTR

#505453

Postby Hornblower » June 6th, 2022, 10:07 pm

murraypaul wrote:The problem is that it is appealing to two totally different sorts of investors:
a) Those that want a steady-as-she goes business that apparently doesn't see massive room for growth, as it couldn't find a profitable use for $500M in cash
b) Those that want to speculate on the price of Bitcoin
I can't imagine the overlap between those two groups is huge, which is why the company is valued at less than the sum of its parts.


Agreed.


Maybe 3 types?

c). Value investors eager to own equity in a profitable company with more in liquid assets than it's market cap.



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murraypaul
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Re: Taking a Speculation on MSTR

#505561

Postby murraypaul » June 7th, 2022, 11:26 am

c). Value investors eager to own equity in a profitable company with more in liquid assets than it's market cap.

This is all based on a very quick look, but it doesn't really seem to be profitable or have fantastic assets.

From the latest report:

Loss from Operations and Net Loss: Loss from operations for the first quarter of 2022 was $170.0 million, compared to $183.2 million for the first quarter of 2021. Net loss for the first quarter of 2022 was $130.8 million, or $11.58 per share on a diluted basis, as compared to $110.0 million, or $11.40 per share on a diluted basis, for the first quarter of 2021. Digital asset impairment charges of $170.1 million and $194.1 million for the first quarter of 2022 and 2021, respectively, were reflected in these amounts.


So strip out the impairment charge, and the actual underlying operations made neither a profit nor a loss, they were basically zero.

They've also issued ~$1 billion in convertible notes, ~$500 million in bonds and ~$1 billion worth of shares to do this, and have doubled down by borrowing against Bitcoin collateral to buy more Bitcoin.

Current market cap is ~$2.66 billion. Current value of Bitcoin held is ~$3.82 billion. Long term net debt is ~$2.36 billion.

I'm not seeing the massive undervaluation? It is basically a holding company for Bitcoin, and moves with Bitcoin prices.

It feels like the CEO is bored of running a normal company and wants to be a crypto bro.

I'd rather just buy Bitcoin, if I wanted that exposure.

Financial figures from: https://www.microstrategy.com/content/d ... 3-2022.pdf

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Re: Taking a Speculation on MSTR

#506857

Postby vand » June 13th, 2022, 12:39 pm

Should be an interesting session for the OP, then.

Personally I think Saylor belongs in jail, and anyone who "invests" in his company deserves to lose all their money.

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Re: Taking a Speculation on MSTR

#510029

Postby Hornblower » June 27th, 2022, 3:54 pm

Update on my speculation.

I've owned MSTR for around a month now. Purchased at $235.67 a share in late May.

Since that time, there's been further ructions in the bitcoin & wider crypto markets with the yield & lending platform Celsius suspending redemptions, the hedge fund 3 Arrows Capital entering default, and yield and lending platform Blockfi requiring refinancing! This is all still playing out, but (famous last words), it appears the worst is behind us now. These companies were taking excessive risk with their customer's funds, and they were punished for it.

All of this drama has affected the bitcoin price, it dropped dramatically from around $24,000 to a low of $18,000 during the month, before recovering to around $21,000 today. There was lots of speculation flying around that hedge funds had opened shorts & were attempting to trigger further selling by these distressed companies, however this seems to have stopped for now. There may be a rally if Celsius are able to issue a statement regarding their position, and if they start allowing withdrawals again. Of course no-one knows where the price will go over the short term.

None of this matters to MSTR who continue to simply hold bitcoin as a treasury reserve asset.


Current price: $189 per share.


I will continue to hold & review again in another month.


H

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Re: Taking a Speculation on MSTR

#510575

Postby murraypaul » June 29th, 2022, 10:37 am

Hornblower wrote:Since that time, there's been further ructions in the bitcoin & wider crypto markets with the yield & lending platform Celsius suspending redemptions, the hedge fund 3 Arrows Capital entering default, and yield and lending platform Blockfi requiring refinancing! This is all still playing out, but (famous last words), it appears the worst is behind us now. These companies were taking excessive risk with their customer's funds, and they were punished for it.


I think that is optimistic. There are several more dominoes left to fall in the crypto exchange world. Voyager, CoinFlex, Bancor, Finblox, and more.

What effect that will have on Bitcoin price is hard to tell though.

Itsallaguess
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Re: Taking a Speculation on MSTR

#510578

Postby Itsallaguess » June 29th, 2022, 10:42 am

murraypaul wrote:
Hornblower wrote:
Since that time, there's been further ructions in the bitcoin & wider crypto markets with the yield & lending platform Celsius suspending redemptions, the hedge fund 3 Arrows Capital entering default, and yield and lending platform Blockfi requiring refinancing!

This is all still playing out, but (famous last words), it appears the worst is behind us now. These companies were taking excessive risk with their customer's funds, and they were punished for it.


I think that is optimistic. There are several more dominoes left to fall in the crypto exchange world. Voyager, CoinFlex, Bancor, Finblox, and more.

What effect that will have on Bitcoin price is hard to tell though.


It's a fascinating experiment, and I'm glad someone else is doing it with their own money.

If there's a more efficient way to introduce uncontrolled, multi-layered counter-party risk sat well away from an initial company investment, then I've yet to see it.

It's deja-Marconi all over again...

Cheers,

Itsallaguess

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Re: Taking a Speculation on MSTR

#510740

Postby Hornblower » June 29th, 2022, 5:40 pm

murraypaul wrote:
Hornblower wrote:Since that time, there's been further ructions in the bitcoin & wider crypto markets with the yield & lending platform Celsius suspending redemptions, the hedge fund 3 Arrows Capital entering default, and yield and lending platform Blockfi requiring refinancing! This is all still playing out, but (famous last words), it appears the worst is behind us now. These companies were taking excessive risk with their customer's funds, and they were punished for it.


I think that is optimistic. There are several more dominoes left to fall in the crypto exchange world. Voyager, CoinFlex, Bancor, Finblox, and more.

What effect that will have on Bitcoin price is hard to tell though.



Yes, you could very well be right.

H

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Re: Taking a Speculation on MSTR

#519554

Postby Hornblower » August 3rd, 2022, 6:10 pm

Today I sold my MSTR at $315.78 for a 32%(ish) gain on my speculation. A nice return for what turned out to be just over 2 months.

I feel that reality has vindicated my initial analysis. I expect that MSTR may increase substantially over the coming years, but this was only ever a short term speculation.

For my next trick I'm going to the casino to put it all on red.

H


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