MicroStrategy's Bitcoin Yield Is Not All That It Seems: Here's the Fine Print

For years, MicroStrategy shareholders have outperformed bitcoin. A $100 investment in each three years ago would today yield $450 and $140, respectively.

MicroStrategy (NASDAQ:MSTR) shareholders have outperformed bitcoin (CRYPTO:BTC) over the last three years, with a $100 investment in each yielding $450 and $140, respectively. But will MicroStrategy CEO Michael Saylor be able to extend this run?

Although investors value the company almost exclusively on its bitcoin holdings, its unique ability to tap debt markets has attracted a higher rate of capital than a simple match of its bitcoin acquisitions. Rather than tracking the price of bitcoin, the company is curiously expanding at a multiple of its bitcoin holdings.

As of Friday’s close of trading on Wall Street, MicroStrategy’s market cap was $71.8 billion — a 2.89 multiple on its then-$24.8 billion worth of bitcoin holdings.

Because the business has little value aside from its bitcoin holdings — it has generated negative earnings and less than $600 million in annual revenue for the last three years — valuing the company based on its multiple is rational.

At a 1X multiple, the market cap of MSTR would equal its bitcoin holdings. Nowadays, its multiple is clearly expanding.

Of course, MicroStrategy has not always traded at a premium to its assets. For example, on October 19, 2020, its market cap was $154 million but it held $440 million worth of bitcoin. Its asset multiple on that date was just 0.35 due to concerns about its ability to repay debts.

That negativity faded by 2021, however, as its multiple rallied for years to Friday’s 2.89. Some investors believe that figure will continue to grow.

Inspired by MicroStrategy’s levitating multiple on bitcoin holdings, bullish estimates from people like Ben Werkman, Dylan LeClair, and many others rained in. According to assorted traders on social media, MSTR could rally from its current stock price of $340 to $2,300, $5,000, $6,000, $8,000, $13,000, or even $35,000.

According to an analyst at Benchmark, Saylor will expand the company‘s multiple far above 2.89 via a “flywheel through which it uses a combination of low-cost debt and equity dilution” to increase bitcoin holdings per MSTR share.

Indeed, MicroStrategy has not only outperformed bitcoin itself but has accreted bitcoin holdings per share since 2021. Even after adjusting for dilution, each MSTR share has accreted bitcoin exposure every year for three years.

Using MicroStrategy’s internal metric, its so-called assumed diluted shares outstanding, executives boasted that each share of MSTR — even after certain adjustments for dilutive share and debt offerings — gained 1.8% bitcoin exposure in 2022, 7.3% in 2023, and over 16% during the first three quarters of 2024.

Somehow, by adding debt and diluting shares to capture some of its expanding multiple, executives have added bitcoin holdings on a per-share basis for more than three years.

However, the formal definition of assumed diluted shares outstanding tempers some of these impressive percentages. Buried in fine print in the Appendix of its Q3 2024 report, the company defines this term — on which it builds its incredible 1.8%, 7.3%, and 16%-and-counting annual accretions — in a way that should sober some extrapolations of these figures.

MicroStrategy defines assumed diluted shares outstanding as common stock outstanding “as of the end of each period plus all additional shares that would result from the assumed conversion of all outstanding convertible notes, exercise of all outstanding stock option awards, and settlement of all outstanding restricted stock units and performance stock units.”

“Outstanding” is a financial term that means “currently issued and held by shareholders.” Importantly, this excludes notes, options, and units that are not held by shareholders as of the end of each reporting period.

In other words, this definition makes it clear that MicroStrategy’s bitcoin accretions per share refer to historical snapshots and therefore exclude the full dilution inclusive of the company’s future obligations. MicroStrategy’s future obligations are considerable.

Most of its debt offerings are four years long with a major event at expiration such as a warrant, option, or other convertible right.

After adjusting for these future obligations, those impressive-looking 1.8%, 7.3%, and 16%-and-counting annual percentages of bitcoin accretion will become far more muted. MicroStrategy even acknowledges this in the fine print of its Appendix to its third quarter financial report.

“Such offerings have had the effect of increasing the BTC Yield without taking into account the corresponding debt,”

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