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Investors took an interest in MicroStrategy Incorporated (MSTR) after HSBC Holdings (HSBC) banned its customers from trading stocks on their online platforms in early April 2021. The bank’s reason was that, following its decision, MSTR was traded as a “virtual currency product” to sell its bonds to buy bitcoins (BTC).
April 2021, HSBC increased its share price by 3%, while MSTR was up 40.13% (Y / Y) almost similar to BTC by + 46.90% over the same period. Also noteworthy is the fact that Bitcoin has been 13 years old since it was first mined by Satoshi and its market value has already reached the trillion mark.
thesis
MicroStrategy’s status as a publicly traded stock in the United States that offers exposure to Bitcoin will prove critical to the growth of its corporate analytics business over the long term. While the two companies may not be related, thousands of online-based businesses use Bitcoins for investment, operational, and transactional purposes. Growth investors will find this stock worthwhile in the long run as the company seeks to diversify its demographic outlook by seeking a cutting-edge clientele through decentralized systems like the BTC offerings.
Business growth strategy
MicroStrategy revenue rose 7% above pre-Covid-19 levels to $ 128 million in the third quarter of 2021. It could have been higher through 2022 had it not been for the 13% decline in software product license revenue to $ 25.8 million. The quarterly decline in subscription billing in 2021 was offset by an increase in annual subscriptions.
Source: MicroStrategy
We note that product license revenue was highest in the fourth quarter of 2019 at $ 30.1 million. At that time, quarterly revenue also saw the highest growth at $ 133.5 million, up 11.5% from Q3 2019. In my view, an increase in product licenses in 2022 will be directly proportional to an increase in total revenue.
Still, MicroStrategy productivity grew 31% from 2020 to 2021, complemented by an increase in investments in cloud, security, and original equipment manufacturers (OEM). The company wants to expand its product leadership through open software. It will soon have a global reach with enterprise customers and OEMs.
We can expect product license registrations to increase as the company migrates to the enterprise and SaaS cloud. License income increased 36% from the third quarter of 2019 to $ 25.8 million.
Verified reviews from Gartner Peer Insights in 2021 showed that IBM (IBM) was rated 4.3 stars from 369 reviews, while MSTR was rated 4.3 stars and 433 reviews. MicroStrategy received higher ratings for its complete BI suite package, ease of integration, and deployment.
Bitcoin stocks
While, as noted earlier, HSBC has indicated that it has no appetite for direct exposure to digital currencies. Goldman Sachs (GS) was ready to offer its wealth management clients BTC investments as well as other virtual assets. Morgan Stanley (MS) was reportedly the first major U.S. bank to give its clients access to bitcoin funds.
For someone like Michael Saylor, CEO of MSTR; Bitcoin’s rising prices are an attractive proposition due to the dominance of cryptocurrency. After buying BTC for $ 9,000 in 2009, Michael now owns at least 17,732 tokens. Priced at $ 47,000, Michael’s holdings are worth $ 833 million and soared to a high of $ 1.2 billion in November 2021.
MicroStrategy’s BTC holdings total 122,478 (worth nearly $ 6 billion), with the company sharing the same beliefs as the CEO – that this is not the time to sell. Many investors would wonder why the company didn’t benefit from the crypto boom after its price hit a record high of $ 69,000 in November 2021. However, if we consider the depleted status of the tokens as well as the identity of BTC as a store of value during high inflation, then it is assumed that BTC will continue to rise through 2022.
Like MicroStrategy, Tesla (TSLA) began acquiring bitcoins, giving up to 1.5 billion in June 2021, Elon Musk confirmed that the electric vehicle company had sold 10% of its stakes to test its ability to move the market. In my view, the institutional liquidation of BTC plays a huge role in maintaining BTC prices with a stronger impact than ETFs.
Source: Finding Alpha
Last year, MSTR did well to track bitcoin prices better than WisdomTree (WETF) ETF, trailing the giant crypto slightly by 0.9%.
As it stands, MicroStrategy has a stronger management capacity of its bitcoins compared to related ETFs. MSTR is not just a finance company; it is an operational unit made possible by the enterprise software business.
Payment company Square Inc. (SQ) also joined the fight, with nearly 8,027 bitcoins in its business by October 2021. Square’s BTC was valued at $ 220 million and bought at an average price of $ 27,407. Unlike MSTR, Square has no plans to add more BTC to its wallet as its attention is now focused on the mining process.
Square’s CEO and former Twitter (TWTR) boss Jack Dorsey said his fintech firm was working on building a BTC mining system. This project would be based on silicon and open source. The overall goal would be to make the crypto mining process less complex or limited to a few companies.
In today’s world, Bitcoin mining companies need multiple application specific integrated circuits (ASIC) and a stable power source. If, in my opinion, Square manages to decentralize the mining process from the big players, MicroStrategy has to sell quickly. The current supply constraints have helped support demand and depress prices.
Still, about 90% of Bitcoin has been mined in Bitcoin mining, which means there is only 10% left. The mining fees for the tokens are expected to go away when all of the BTC is mined.
Source: Coin Central
According to reports, Satoshi designed Bitcoin to have a pool of 21 million tokens. Currently there are only 2.134 million coins with 18 million in circulation. Due to the halving of the changes and the mining difficulties, the last bitcoin is expected to be mined in 2140.
Miners who maintain the integrity of the network (by creating new blocks from the source code) will be rewarded with the remaining bitcoins. Due to the Bitcoin halving process programmed in 2020, each block will result in 6.25 instead of 12.5 Bitcoins. It can still be seen that even if Square sets up a new mining system, it could take a while for prices to drop due to current supply restrictions.
Bitcoin lending
As more and more BTC is mined in the current era, MicroStrategy’s option to mortgage the coins or lend them for returns will secure serious profits. The ideal situation aside, MSTR is still able to use Bitcoin to create a long term debt plan.
Under favorable conditions, MSTR could easily target bitcoins and of course lend it to a strong counterparty. At this point, Bitcoin becomes a long-term asset, especially now that it is even offering senior notes to buy the coins.
Risks
MSTR’s net change in cash for the third quarter of 2021 was $ 4.2 million. That small gain came after a decline of 214.44% to $ -397.1 million from $ 347 million in December 2020. The company spent nearly $ 400 million primarily on bitcoin purchases. Quarterly gross income was $ 442.84 million versus total debt of $ 2.24 billion.
It remains to be seen how generating income from BTC will be profitable for the company, considering it plans to borrow the cryptocurrency. A decline in BTC prices means lower profits for investors due to the direct correlation between returns and token prices.
MicroStrategy has yet to explain how it will incorporate blockchain technology into revenue generation. Essentially, the company is spending a lot of money buying cryptocurrencies, unlike Square, which could soon take over BTC mining.
Bottom line
MicroStrategy Incorporated’s operational strategy of buying bitcoins to raise billions of unsecured debt to fund the purchase will pay off in the long run. As an enterprise analytics company, MSTR benefits from innovations, especially since the switch to a SaaS / cloud platform. The demand for business analytics is already growing as the company offers proven solutions, including the application of embedded OEM business.
However, the company has yet to show how it will incorporate blockchain technology into its business as it stores huge amounts of BTC. MSTR will soon take a leadership role in the Bitcoin community despite using debt and equity to acquire the digital asset. From my point of view, MSTR is a buy and offers a solid way to track BTC.
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