MSTR's latest financial report interpretation: capital increase and further BTC reserve

Original title: “‘No production, only hoarding coins’: MSTR Latest Financial Report Reveals MicroStrategy’s Capital Enrichment and High Premium Valuation Model”

Original author: Alvis, MarsBit

In history, whenever a traditional industry reaches its peak, some groundbreaking companies often emerge, finding a unique ‘production method’ in the market and attracting capital with their unique strategies. These companies rarely ‘produce’ actual things, but concentrate resources on a core asset—like Shell, which maintained its valuation through oil reserves, and gold mining companies dominating prices through gold mining and reserves. And this morning, with the release of MicroStrategy’s financial report, we once again see such a company: not known for ‘production’, but breaking traditional valuation rules and becoming one of the world’s largest and most unique BTCholders with a huge investment in BTC.

From Software Company to BTCWhale: The Transformation Journey of MicroStrategy

MicroStrategy, ticker symbol MSTR, was originally built by business intelligence software, but founder Michael Saylor stepped on the gas pedal in 2020 and went straight to the “fast lane” of BTC. Since this year, Saylor no longer let the company stay in the traditional “production”, but saw the potential of BTC as a core asset, began to exchange the company’s reserves for BTC little by little, and even bet his own net worth, step by step MicroStrategy into BTC’s “Coin Hoarding Bank”. In Saylor’s eyes, BTC is the gold of the digital world, the anchor of the future of global finance. Some people think he’s crazy, others call him a “fanatical preacher” of BTC, but he firmly believes that he is winning a “new gold standard” for the company.

Saylor does not intend to take the traditional approach. Instead, his positioning for MicroStrategy is more like ‘air express delivery’ compared to the ‘ground logistics’ of traditional ETFs. MicroStrategy directly purchases BTC through financing methods such as issuing bonds, borrowing, and equity issuance, which is flexible, efficient, and allows them to chase the rising trend of the BTC market. This not only makes MicroStrategy a stock symbol but also a ‘fast-track target’ in the BTC market, with the company’s Market Cap directly linked to the fluctuation of BTC. Saylor’s actions have sparked controversy, with well-known investor Peter Schiff even mocking on social platform X, ‘The company doesn’t produce any products but achieves a super high Market Cap by hoarding BTC.’ He pointed out that MicroStrategy’s Market Cap has surpassed most gold mining companies and is second only to Newmont Corporation.

In response, Saylor’s answer is simple: ‘BTC is our future reserve asset.’ With this firm belief, MicroStrategy has accumulated over 250,000 BTC and plans to raise $4.2 billion in the next three years for further holdings. MicroStrategy’s ‘production’ method is not traditional material manufacturing, but the construction of a new financial system around BTC ‘infrastructure’.

Some say Saylor is gambling, but perhaps, this is not just a bet, but a belief. He took a different path with a venture, making MicroStrategy an alternative target in the financial market. As he said, "We don’t produce, we just ‘hodl’.

MSTR Latest Financial Report Interpretation: Capital Increase and BTC Reserves Further Strengthened

1. Overview of Financial Report and Financing Plan

MicroStrategy’s financial report released this time presents the expected Favourable Information overall. The company plans to finance $42 billion in the next three years to continue to increase its holdings of Bitcoin, and has completed the repurchase of previously staked BTC. As of the financial report date, MicroStrategy holds a total of 252,220 BTC.

Since the end of the second quarter of 2024, the company has purchased an additional 25,889 BTC at a total cost of approximately $1.6 billion, with an average price of $60,839 per coin. The current total market value of the company is approximately $18 billion, with a cumulative cost of $9.9 billion for BTC purchases, at an average price of approximately $39,266 per coin. The company also raised $1.1 billion through the sale of Class A common stock and an additional $1.01 billion through the issuance of convertible bonds due in 2028, while repaying $500 million in senior secured notes, releasing all BTC assets from collateral. This release of collateral significantly enhances the company’s financial flexibility and reduces its risk in extreme market conditions.

2. Cash Reserves and Future Financing Goals

MicroStrategy currently holds $8.36 billion in cash, providing stable financial support for further BTC purchases in the future. The company has also announced phased financing targets: $10 billion in 2025, $14 billion in 2026, and $18 billion in 2027, totaling $42 billion. CEO Michael Saylor’s plan is aimed at strengthening the company’s core asset reserves by gradually increasing its BTC holdings, which is undoubtedly seen by the market as Favourable Information rather than negative news.

3. Market Cap and Book Value

As of October 29, 2024, MicroStrategy’s Market Cap is about 18 billion US dollars, while its book value is 6.9 billion US dollars, with these figures adjusted for 3 billion US dollars in accumulated impairment losses. The impairment is not due to MicroStrategy’s sale of BTC, but rather based on book value adjustments under current accounting standards. According to accounting rules, if the market price of BTC declines in a quarter, the company must lower the book value of these assets and record an impairment loss. However, even if the price subsequently rebounds, the book value will not automatically recover, and appreciation can only be realized upon sale. If future changes in accounting standards (such as the adoption of FASB’s fair value measurement) are implemented, this issue is expected to be improved.

4. The flexibility advantage of BTC as the core asset

As a core asset, BTC gives MicroStrategy more capital operation flexibility compared to Spot ETF. The company compares its BTC reserves to the oil reserves of an oil company. Just as an oil company deals with unrefined and refined products such as gasoline, diesel, and aviation fuel, MicroStrategy also sees BTC reserves as a capital preservation tool. Through this core asset, the company is able to enhance productivity and implement innovative financial strategies.

5. MicroStrategy’s BTC Holding Principles

MicroStrategy has established eight core principles for holding Bitcoin, reflecting its long-term investment strategy and market orientation:

· Continue to buy and hold BTC, focusing on long-term gains;

· Prioritize the long-term value of MicroStrategy common stock;

· Maintain transparency and consistency with investors;

· Using intelligent leverage to ensure that the company performs better than the BTC market;

· Quickly and responsibly adapt to market dynamics, and continue to rise;

· issuance innovative BTC supports fixed income securities;

· Maintain a healthy and stable balance sheet;

· Drive BTC to become a global reserve asset.

6. The difference between MicroStrategy and BTCSpot ETF

Compared with BTC Spot ETF, the unique feature of MicroStrategy lies in its financing method. ETF investors need to actively purchase ETF shares, while MicroStrategy finances through various channels such as equity, unsecured or secured debt, convertible bonds, and structured notes, to be used for directly increasing BTC holdings. This ‘equity financing’ model enables the company to actively raise funds to achieve long-term strategic holding of BTC.

The Cycle of Capital and High Premium Rates: MicroStrategy’s Valuation Code

The higher the premium rate, the more suitable for large-scale financing.

MicroStrategy’s valuation model relies on the market capitalization premium, increasing the BTC (BTC) holdings through dilutive financing to thicken the BTC holdings per share, thereby boosting the company’s market cap. Here is a detailed analysis of this model:

Simplified Analysis of Premium Rate and Thickening Effect

Assuming the price of BTC is $72,000, MicroStrategy holds 252,220 BTC, with a total Holdings value of approximately $18.16 billion. With the current company’s Market Cap at $48 billion, MicroStrategy’s Market Cap is 2.64 times the total value of BTC Holdings, resulting in a current premium rate of 164%.

Assuming the company’s current total shares are 10,000 shares, the open interest per share corresponds to approximately 25.22 BTC.

If MicroStrategy plans to raise $10 billion through additional issuance, the total share capital after the issuance will become 12,083 shares (calculation method: the financing amount of $10 billion divided by the current Market Cap of $48 billion, resulting in 0.2083 times, that is, the share capital will increase by 20.83%, and the total share capital will become 10,000 shares multiplied by 1.2083, approximately equal to 12,083 shares). In this case, the company can use $10 billion to purchase approximately 138,889 BTC at a price of $72,000, increasing the total BTC holding to 391,109. As a result, the BTC open interest per share also increases to 32.37 BTC (using 391,109 BTC divided by 12,083 shares), with an increase of approximately 28%.

Similarly, if financed according to the plan, it will be 42 billion US dollars.

Further assuming that MicroStrategy issues 87.5% of its capital stock, i.e. financing $42 billion by issuing 8,750 shares, the total capital stock after the issue will increase to 18,750 shares (calculation method: multiplying 10,000 shares by 1.875). If the company purchases BTC at a price of $72,000, it can acquire approximately 583,333 BTC, increasing the total open interest to 835,553 BTC. At this point, the per share BTC open interest will increase to 44.23 BTC (i.e. 835,553 BTC divided by 18,750 shares), a gain of about 75% compared to the previous 25.22 BTC.

If this thickening effect is achieved within three years, the average annual thickening will be 25%.

Of course, there will be fluctuations in the BTC price when reinvesting, which may be higher or lower, but this will not change the conclusion of thickening. In the case of MicroStrategy’s extremely high premium rate (currently about 180% -200% Fluctuation), the company should maximize financing by utilizing the premium rate as much as possible. Therefore, although CEO Michael Saylor’s $4.2 billion financing plan initially caused market panic, market sentiment quickly recovered, indicating the company’s clear understanding of the current pattern and a rational decision that maximizes shareholder equity.

The logic behind MicroStrategy’s advantages and high premium rate

Many investors may wonder why the market is willing to buy MicroStrategy’s ATM or convertible bonds at a high premium instead of directly purchasing BTC ETF. This involves several unique advantages of MicroStrategy:

Continue to increase profits

By continuously increasing the BTC reserves through financing, MicroStrategy has achieved an annualized return enhancement of 6% -10%, reaching a 17% annualized enhancement from 2024 to date. Under the current high premium rate financing model, the annualized enhancement is expected to exceed 15%. Calculated at a valuation of 10 to 15 times, MicroStrategy’s premium corresponds to a valuation of 150% -225%.

Volatility and Market Bridge

Michael Saylor believes that MicroStrategy acts as a bridge between the traditional Capital Market and the BTC market. The current market capitalization of BTC is about $1.4 trillion, with a relatively low penetration rate. If the penetration rate increases, even if only 1% of the funds in the global $300 trillion bond market are allocated to BTC, it will bring MicroStrategy potential incremental funds of about $3 trillion. In addition, the convertible bonds issued by the company not only provide some downside protection but also offer potential options for pumping BTC prices.

Conclusion: The high premium rate has a self-reinforcing effect in a Bull Market.

In the bull market environment, MicroStrategy’s valuation model and high premium financing mode form a self-reinforcing positive cycle. The higher the premium rate, the larger the financing amount of the company, thereby increasing the per share BTC reserve, further pushing up the company’s market capitalization. This market effect rolls like a snowball, especially when the BTC price is expected to rise to the $90,000-100,000 range, MicroStrategy may be able to continue to accelerate under the escort of high premium rates.

Michael Saylor’s bet and the market’s response seem to indicate a subtle game between TradFi and digital assets. In this dual confrontation of capital and technology, will MicroStrategy achieve a financial revolution or just be a flash in the pan? What we are witnessing may be a certain harbinger of future financial changes.

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