Updated: Jun 22, 2022
How does one value crypto's poster child?
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MicroStrategy Inc. is crypto's poster child. At the end of March it owned 129,218 bitcoins that were worth $6.2 billion at the prevailing market price of $48,240. It also owned software businesses that were valued in total at around $100 million and whose revenues in the first quarter were 3% lower than a year earlier. The company had $2.4 billion of long-term debt - used to fund purchases of bitcoin - and other liabilities of $414 million. Its equity, based on the market price of bitcoin, was $3.9 billion.
I estimate that its equity - based on current bitcoin price of $19,250 - is now around $350,000. This represents a fall of 91% compared with end of March. However, MicroStrategy's share price has fallen only (sic) 66% - this was as of yesterday's close so unless the bitcoin price bounces back from its fall today it will be down more on Monday. If you think falls of 91% and 66% are in the same ballpark, think again. The share price has not outperformed equity by 25% (91% minus 66%) but by 279% - the calculation is geometric not arithmetic.
Microstrategy is also now facing margin calls in relation to its debt which will make things worse - it will be forced to sell bitcoins which will crystalise losses as well put further downward pressure on bitcoin's price.
I do not know how to value MicroStrategy. It does not appear - given that it is shrinking - that the software business should be attributed a high multiple. This leaves the bitcoin business which can be valued as an option - a bounce in the bitcoin price in the next few weeks could quickly see the share price double from here. But if you also believe that bitcoin has little or no intrinsic value then at some point MicroStrategy gets into serious trouble. It wouldn't take much for the company to go bust: by my estimate a bitcoin price of just below $17,000 would wipe out equity completely. That is 12% below the current price which could happen in a day.
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.
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