MicroStrategy's Returns Are 3X Higher Than Bitcoin: Time to Buy?

MicroStrategy MSTR has become one way many investors have found to get into Bitcoin BTC/USD. Looking at the returns of the two over the past three years, investing in MicroStrategy has been far superior to investing in Bitcoin.

Technology company MicroStrategy (NASDAQ:MSTR) has become a popular way for many investors to gain exposure to Bitcoin (CRYPTO: BTC/USD). But a closer look at the company's financials reveals that there's more to the story than meets the eye.

Here's a breakdown of MicroStrategy's lesser-known software business and how it contributes to the company's overall value proposition:

MicroStrategy's business can be broadly divided into two segments: its bitcoin purchases and its software operations. The latter is primarily driven by its MicroStrategy ONE data analytics software, which offers business intelligence tools and enables users to leverage machine learning and create customized analytics.

However, this segment of the company's business has been facing some challenges, with a decline in revenue from $122 million in Q1 2023 to $111 million in Q2 2024, a decrease of 9%. The software business is also虧損, and the losses are worsening. In Q1 2023, the虧損 was half a million dollars, but by Q2 2024, it had surged to nearly $19 million on a non-adjusted basis.

When adjusted, the business was profitable in both periods, with $2 million in adjusted net income reported last quarter. But overall, the software business generates minimal profits.

Despite the company's claims that the business is poised for growth and that its unprofitability now doesn't preclude future earnings, the numbers speak for themselves. Last quarter, the software segment's subscriptions and services revenue did increase by 21%.

However, support revenue still accounts for over half of the total software business revenue, and overall revenue still declined by 7%. On the other hand, the company's subscription billings, which indicate future revenue, increased by 45%.

These increases could support the argument that the software business may generate higher revenue in the future. But with only $2 million in adjusted net income last quarter, it's difficult to conclude that the software business alone is valued at $16 billion, even considering potential future revenue.

Another key value proposition that MicroStrategy highlights, and which many investors have come to associate the company with, is its ability to incur very low-cost debt to acquire bitcoin. The company has over $3.8 billion in debt, primarily through convertible bonds, at an average interest rate of 1.6%.

This is significantly lower than the rate at which any individual could borrow funds, given that the effective Fed Funds Rate is around 5%. Recently, the company announced that it completed another offering of $1 billion in convertible bonds, which will further reduce the company's average interest rate to 1.4%.

By investing in Micro‌استراتژی, investors can gain leveraged exposure to bitcoin at a much lower cost than they could otherwise. This is why many who are bullish on bitcoin are placing a substantial premium on Micro‌استراتژی over bitcoin itself.

However, it's crucial to note that convertible debt can be converted into equity, potentially diluting shareholders' ownership stakes. This would significantly reduce the value of the low-cost debt strategy, especially considering that nearly 90% of the company's debt is convertible.

The company addresses this concept with its BTC Yield metric, which aims to show the value addition of investing in Micro‌استراتژی over bitcoin by accounting for potential dilution. It achieved a positive BTC Yield of 12% in 2024 and anticipates it to be between 4% and 8% over the next three years, indicating that the strategy is adding value.

But is it adding enough value to justify the company's $16 billion valuation over its bitcoin holdings? In my opinion, the company's valuation is over double the value of its bitcoin, while it only provides a 4% to 8% yield compared to paying for bitcoin itself. The article "MicroStrategy's Returns Are 3X Higher Than Bitcoin: Time to Buy?" originally appeared on MarketBeat.

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