Convertible Bond Expert Breaks Down Why MicroStrategy Is Soaring | Richard Byworth

Summary

The discussion delves into MicroStrategy's unique approach to accumulating Bitcoin, leveraging convertible bonds and share issuance to amass Bitcoin at a rapid pace, while also introducing significant risk through leveraged exposure. Key misconceptions about the company, particularly its comparison to Bitcoin ETFs, are addressed, emphasizing that MicroStrategy’s strategy creates more Bitcoin per share, unlike traditional ETFs that involve management fees. The conversation explores the implications of Bitcoin's price movements on the company’s valuation and the growing trend of other companies adopting similar strategies. Ultimately, the talk highlights the disruptive potential of MicroStrategy in the financial landscape.

Takeaways

• 😀 MicroStrategy’s strategy is fundamentally different from a typical ETF. It continuously increases Bitcoin holdings per share without charging management fees, unlike traditional ETFs that erode value with annual fees.
• 📉 MicroStrategy is using aggressive leverage to fund Bitcoin purchases, including debt and convertible bonds, which introduces both significant upside potential and substantial downside risk if Bitcoin’s price declines.
• 💰 The company is not focused on generating traditional earnings (via an income statement), but instead is increasing Bitcoin holdings, which could later lead to profits through capital gains or dividends.
• 🔮 The company's unconventional strategy could be misunderstood by investors who fail to see the long-term value in Bitcoin holdings, which are growing steadily despite fluctuations in Bitcoin’s price.
• 📊 The value of MicroStrategy’s stock is tied to its ability to accumulate Bitcoin, meaning investors should think of this as a bet on Bitcoin’s future price, rather than on traditional earnings reports.
• 🚀 MicroStrategy’s long-term value proposition is unique because it’s leveraging the capital markets to increase Bitcoin exposure, something individual investors can’t do as easily due to the high costs of borrowing or using leverage.
• ⚖️ MicroStrategy’s decision-making and stock price are highly sensitive to Bitcoin’s performance. A severe downturn in Bitcoin prices (e.g., 80% drop) could result in the stock trading below its Net Asset Value (NAV).
• 🧐 Index inclusion for MicroStrategy is not a given, despite its growth. Just like Tesla, which faced delays in being added to indices, MicroStrategy might need to prove its strategy’s stability over time to get included in major indices like the NASDAQ or S&P.
• 💡 The market might not fully appreciate the value of MicroStrategy's strategy now, but if the model succeeds, it could lead to higher P/E multiples and a much higher stock price as more investors recognize the value in accumulating Bitcoin rather than traditional earnings.
• ⚠️ Leveraged ETFs that mirror Bitcoin and MicroStrategy’s strategy pose significant risks, as their high gearing and reliance on short-dated options can cause them to bleed value quickly, making them unsuitable for long-term holding or unhedged positions.
• 📈 Richard Byworth's podcast, 'See the Future,' explores broader issues beyond Bitcoin and financial markets, offering insights into various global challenges. It provides another outlet for his views on the evolving market dynamics.

Q & A

What is the primary business strategy of MicroStrategy that makes it unique in the market?

MicroStrategy’s primary strategy is using its stock issuance and debt (including convertible bonds) to acquire Bitcoin. By leveraging the capital markets, MicroStrategy can increase its Bitcoin holdings without directly using cash or traditional methods, effectively using its stock and debt as a vehicle to accumulate Bitcoin on its balance sheet.

How do convertible bonds work in the context of MicroStrategy’s strategy?

Convertible bonds allow investors to convert debt into MicroStrategy shares at a discounted price, which reduces the company’s debt load. This conversion results in new shares being issued, diluting the stock, but it also helps the company eliminate debt and increase its Bitcoin holdings.

What’s the major misconception about MicroStrategy in comparison to traditional ETFs?

A major misconception is that MicroStrategy operates like an ETF. While ETFs typically charge management fees that reduce shareholder value over time, MicroStrategy’s strategy is designed to increase Bitcoin holdings per share, without charging any fees, effectively growing the value of each share by acquiring more Bitcoin.

What risks are associated with MicroStrategy’s highly leveraged Bitcoin strategy?

The main risk is that if Bitcoin’s price significantly drops, MicroStrategy’s stock could also see a sharp decline. In the worst-case scenario, the company’s shares could trade at a discount to its net asset value (NAV), especially if the value of its Bitcoin holdings is impaired by a major market downturn.

What are the key benefits of using debt and convertible bonds to acquire Bitcoin, as practiced by MicroStrategy?

The benefits include allowing the company to rapidly accumulate Bitcoin without depleting its cash reserves. It also helps leverage the capital markets to grow Bitcoin holdings per share, providing significant upside potential in Bitcoin’s value, while spreading the risk across different forms of financing.

How does the issuance of new shares affect MicroStrategy’s stock price?

Issuing new shares to fund Bitcoin purchases dilutes existing shareholders, but the overall impact on the stock price is neutral as long as the added Bitcoin value increases proportionally. The issuance helps increase the company's asset base (Bitcoin) per share, which theoretically should enhance the stock’s value over time.

What role does the concept of NAV (Net Asset Value) play in assessing MicroStrategy’s stock?

NAV is a crucial metric in determining the intrinsic value of MicroStrategy’s stock, as it represents the total value of the company's assets (Bitcoin). Investors are closely watching the premium or discount to NAV, as it helps gauge how well the market is valuing MicroStrategy in relation to its Bitcoin holdings.

Why is the idea of 'earnings' difficult to apply to MicroStrategy’s business model?

MicroStrategy doesn’t generate traditional earnings through operations or sales. Instead, the value it creates is reflected in the appreciation of its Bitcoin holdings, which are accumulated through the issuance of stock and debt. This unique model doesn’t align with conventional earnings metrics but could be considered a form of value generation via asset accumulation.

What’s the concern about leveraged ETFs in the context of MicroStrategy and Bitcoin?

Leveraged ETFs, especially those that use options to amplify returns, can be risky for long-term holders. They are designed to generate large short-term returns if the market moves in the expected direction but typically suffer from time decay and compounding issues, leading to losses if held over a longer period. This makes them less ideal for MicroStrategy investors who want exposure to Bitcoin.

What might happen if MicroStrategy’s Bitcoin strategy leads to significant gains or losses in the next 12 months?

If Bitcoin’s price increases, MicroStrategy’s stock could see a substantial rise as the company’s Bitcoin holdings appreciate, expanding its NAV and increasing its share value. Conversely, if Bitcoin’s price crashes, the stock could face steep declines, with the potential for the premium to NAV to vanish, and even trade at a discount to NAV, causing significant downside risk.