INVESTMENT THESIS FOR MICROSTRATEGY ($MSTR)

THIS DOCUMENT WILL UPDATE AUTOMATICALLY WITH NEW REVISIONS.

NOT FINANCIAL ADVICE.

H/T @ryQuant, @PunterJeff, @billfour, @adam3us, @Z06Z07, @Adrian_R_Morris, @BenWerkman, @BitStrategy21, @80IQmindset, @btcjvs, @BritishHodl, @TomerStrolight, @PrestonPysh and others.

Read my investment thesis on Bitcoin here.

Follow me on X here.

MICROSTRATEGY ONE-PAGER SUMMARY

PROFILE

THE BUSINESS

MicroStrategy is an analytics software company transitioning into a Bitcoin Treasury Company (BTC) that buys and holds bitcoin as a reserve asset and leverages it to grow corporate value.

THE MANAGEMENT TEAM

Michael Saylor founded MicroStrategy in 1989 and has steered the company through the fast-evolving technological landscape. He is a unique visionary and bold leader and is one of very few who have the understanding, passion and commitment necessary to aggressively and successfully pursue a bitcoin strategy.

THE FINANCIALS & KPI’S

MicroStrategy is the largest corporate holder of Bitcoin and has increased its Bitcoin Per Share by over 12.5% a year for the past 2 years.

THE OPPORTUNITIES

• Visionary leader with skin in the game.
• Monopolising digital capital.
• Financial leverage flywheel.
• New FASB rules adoption will allow MicroStrategy to report its bitcoin holdings at fair value.
• Future S&P 500 and NASDAQ index inclusion will accelerate and strengthen bitcoin flywheel.
• Poised to become the “Amazon of fixed income” by becoming a Bitcoin bank.

THE RISKS

• Counterparty Risk
• Leverage Risk
• Executive Order 6102

CONCLUSION

Through its ability to intelligently leverage capital markets, MicroStrategy provides a way for investors to significantly outperform alternative Bitcoin investment vehicles.

Additional tailwinds that are likely to accelerate MicroStrategy’s growth include imminent adoption of the new FASB rules and potential inclusion to indexes such as the S&P 500 and NASDAQ.

FULL ANALYSIS

THE BUSINESS

MICROSTRATEGY

WHAT IS MICROSTRATEGY?

Founded in 1989, MicroStrategy is the largest publicly traded analyst software company in the world that is transitioning to become the largest publicly traded Bitcoin Treasury Company.

INDUSTRY

WHAT INDUSTRY IS THE BUSINESS IN?

• Business Intelligence (Software Side)
• Financial Services (Bitcoin Treasury Company Side)

NARRATIVES

Narrative epidemics can be fast or slow, big or small. Narrative constellations have more impact than any one narrative. The economic impact of narratives may change through time. Changing details matter as narratives evolve over time. Truth is not enough to stop false narratives — Truth matters, but only if it is in-your-face obvious. Contagion of economic narratives builds on opportunities for repetition. Reinforcement matters. Economic narratives thrive on human interest, identity and patriotism.

WHAT IS THE BUSINESS’ LONG-TERM NARRATIVE?

The narrative will evolve over time.

MicroStrategy is a Bitcoin monopoly that will become the “Amazon of fixed income.”

“I want to own dominant technology monopolies that everybody needs, nobody understands and are unstoppable.” — Saylor

IS THE NARRATIVE CLEAR, SIMPLE, CREDIBLE, AUTHENTIC & EMOTIONAL?

Good business storytellers must understand their business, their audiences and themselves and must craft clear, simple stories that reflect reality.

• Resoundingly so.

ON A SCALE OF 1-10, HOW CONTANGIOUS IS ITS LONG-TERM NARRATIVE?

• 9.5

IS THE CURRENT NARRATIVE AROUND THE BUSINESS BEING DRIVEN BY INTERNAL OR EXTERNAL FORCES? IF INTERNALLY, IS THE NARRATIVE BEING BACKED UP BY RESULTS & DATA?

• Internal. Resoundingly so.

BUSINESS MODEL

WHAT IS THE BUSINESS’ BUSINESS MODEL?

Leverage capital markets to borrow fixed, low-cost long-term debt to increase Bitcoin Per Share (BPS).

MOAT

Companies with an enduring moat protect their “above average” returns for longer.

"When you encounter these truths that other people don't understand, you just have to latch on to them big-time…Anytime you get a truth that humanity doesn't understand, that's a huge competitive advantage.” — Pabrai

DOES THE BUSINESS HAVE A LONG-TERM COMPETITIVE ADVANTAGE?

Yes. MicroStrategy is monopolising digital capital.

DOES THE BUSINESS HAVE A COMPETITIVE & DURABLE MOAT?

• Brand Recognition
• Culture
• Cult
• First Mover Advantage
• Flywheel
• Monopoly
• Optionality
• Visionary

IS THE MOAT WIDENING OR NARROWING?

• Widening.

FLYWHEEL

LEVERAGING FINANCIAL MARKETS

1. Raise capital.
2. Use capital to increase bitcoin holdings.
3. Bitcoin price appreciation leads to increased value of bitcoin holdings.
4. Increased value of bitcoin holdings leads to increased MicroStrategy stock price.
5. Increased MicroStrategy stock price leads to increased capacity to raise capital.
6. Repeat.

MARKET INDEXES

MicroStrategy stands to benefit disproportionately from index inclusion due to a reflexive flywheel.

1. The more passive flows it attracts from indexes, the higher its share price.
2. The higher its share price, the more capital it can raise.
3. The more capital it can raise, the more bitcoin it can buy.
4. The more the price of bitcoin increases, the bigger its market cap.
5. The bigger its market cap, the bigger the weighting in indexes.
6. The bigger the weighting in indexes, the more passive flows it attracts.
7. Repeat.

MENTAL MODELS

WHAT MENTAL MODELS ARE RELEVANT, EITHER FOR OR AGAINST?

• MicroStrategy Is The Amazon Of Fixed Income

The same way Amazon became the go-to for consumer products at scale is the same way that MicroStrategy is becoming the go-to for financial products at scale.

• MicroStrategy Is The Standard Oil Of Bitcoin

The same way Rockefeller standardised crude oil as an energy resource, MicroStrategy is standardising Bitcoin as a financial resource.

The same way Standard Oil redefined the energy industry, MicroStrategy is redefining the financial industry.

• MicroStrategy Is Leading The Digital Transformation Of Energy

MicroStrategy is leading the digital transformation of energy by capturing low frequency energy from the analogue world and transmuting it into high frequency energy in the digital world.

MicroStrategy capture low frequency analogue energy — fiat — that is decreasing in value and transmutes it into high frequency digital energy — bitcoin — that is increasing in value.‬‬‬‬‬

MicroStrategy aggregates and leverages impure fiat and transmutes it into pure bitcoin.

"It's not a money glitch. It's a digital transformation of the capital markets.” — Michael Saylor

• MicroStrategy Is The Next Digital Monopoly

Amazon monopolised digital commerce. Apple monopolised digital devices. Google monopolised digital information. Facebook monopolised digital relationships. Netflix monopolised digital entertainment. Spotify monopolised digital music. MicroStrategy is monopolising digital capital.

• MicroStrategy Is The New Hurdle Rate

MicroStrategy is the new minimum rate of return that investors must consider when evaluating alternative investment opportunities.

• MicroStrategy Is Securitising Bitcoin

MicroStrategy is securitising Bitcoin by creating financial products that allow investors to gain indirect exposure to the asset without directly purchasing, holding or managing the asset itself.

MicroStrategy is wrapping a commodity as a security.

“MicroStrategy has made a strategic decision to securitize bitcoin as an asset class. We will live or die based on bitcoin." —Michael Saylor

• MicroStrategy Is The Bridge Between TradFi & Bitcoin

MicroStrategy is capturing capital that either won’t — because it’s volatile — or can’t — because it’s forbidden — otherwise be deployed into Bitcoin. This capital is then converted into bitcoin, removing supply forever. (H/T @TomerStrolight)

MicroStrategy is the most efficient and effective alternative vehicle for capital that is either restricted (because of regulations) or reluctant (because of volatility) to flow directly in Bitcoin.

By providing indirect exposure to bitcoin through various products, MicroStrategy attracts capital that otherwise wouldn’t be invested in the asset, transforms it into bitcoin and removes the respective supply, forever.

Bitcoin bridges the gap between the physical realm and the digital realm. MicroStrategy bridges the gap between Bitcoin and TradFi.

MicroStrategy creates financial instruments with different levels of volatility, performance and risk to suit different types of investors.

• MicroStrategy Is The Bridge To A Bitcoin Standard

MicroStrategy is spearheading the global shift to a Bitcoin standard, paving the way for widespread adoption and guiding the transition.

“MicroStrategy is the vehicle by which the entire world transitions to a Bitcoin standard. They're building the road and then driving the world down the road to full Bitcoin adoption.” — @PunterJeff

• MicroStrategy Is Wrapped Bitcoin

MicroStrategy acts like wrapped Bitcoin for traditional finance, providing investors with indirect exposure to the asset through its stock without having to buy it directly. Investors can customise their exposure based on their risk tolerance and return goals.

• MicroStrategy Is Both Long Global Carry & Short Global Carry

MicroStrategy is the only trade in the world that is both short global carry and long global carry.

MicroStrategy benefits from both buying bitcoin during times of loose monetary conditions (long global carry) and holding bitcoin during times of tight monetary conditions (short global carry).

Consequently, it’s able to profit from two seemingly opposing financial strategies at once.

• Tipping Point

All forms of progress (momentum) happen gradually then suddenly.

When Bitcoin reaches its tipping point and increases in price exponentially, so too will MicroStrategy.

• Lindy Effect

The Lindy Effect describes robustness. The longer something has survived, the longer its likely to survive. The longer something hasn't happened, the less likely it will happen.

MicroStrategy’s current operating history of 35 years suggests its likely continue surviving long into the future.

• Volatility Is A Feature, Not A Bug — MicroStrategy Profits From Volatility

MicroStrategy issues convertible bonds to raise cash, which it then uses to buy Bitcoin.

These bonds are attractive because they offer investors consistent interest payments as well as the potential to convert them into MicroStrategy shares which are tethered to Bitcoin's performance.

By doing this, MicroStrategy effectively "sells volatility.” While investors benefit from Bitcoin's potential upside through the bonds' conversion feature, MicroStrategy benefits from the capital raised to increase its Bitcoin holdings.

Volatility is vitality. Reflexivity is the lifeblood.

“The volatility is the price you pay in order to create billions of dollars of credit and liquidity at your fingertips all times, everywhere, for everybody.” — Michael Saylor

• $MSTR Benefits From Both Moves Up & Moves Down

$MSTR is the only stock where shareholders can celebrate — and benefit from — both moves up and moves down in price.

When the price moves up, shareholders benefit from the increased value of MicroStrategy’s Bitcoin holdings, driving NAV growth and boosting share prices. When the price moves down, shareholders benefit as MicroStrategy can issue equity to buy more Bitcoin at lower prices, increasing future per-share Bitcoin leverage when the price recovers.

KPI’S

WHAT ARE THE MOST IMPORTANT KPI’S FOR MEASURING THE SUCCESS OF THE COMPANY?

• Bitcoin Per Share

BITCOIN PER SHARE

Bitcoin Per Share is defined as the % change in period-to-period between Bitcoin holdings and Assumed Diluted Shares Outstanding.

COMPETITION & MARKET SHARE

IS THE BUSINESS CLEARLY DIFFERENTIATED FROM ITS COMPETITORS?

Yes. It has a monopoly on Bitcoin.

WHO ARE THE BUSINESS’ MAIN COMPETITORS?

Within the context of Bitcoin, it has none.

THE OPPORTUNITIES

BITCOIN TREASURY COMPANY

MicroStrategy is transitioning from an analytics software company into a Bitcoin Treasury Company (BTC) that buys and holds bitcoin as a primary reserve asset and leverages it to preserve and grow corporate value.

“We're building up a massive digital capital base that we can then lever, that will support our equity, our options, our derivatives and all the fixed income instruments we issue.” — Michael Saylor

“Nothing is more powerful than an idea who’s time has come.”

BITCOIN PER SHARE (BPS)

MicroStrategy can both buy bitcoin and buyback shares in order to increase its Bitcoin Per Share.

If the increase in Bitcoin holdings outpaces the relative dilution from issuing new shares, the net Bitcoin per share increases.

“Our objective is to find ways to generate incremental bitcoin for our shareholders and do that with either cash flow from the business or do it through intelligent accretive financings of equity or debt or other intelligent operations. Also, if you just buy the bitcoin you can't generate yield.” — Michael Saylor

MICROSTRATEGY VERSUS ALTERNATIVE BITCOIN INVESTMENT VEHICLES

MicroStrategy offers a unique value proposition compared to other Bitcoin investment vehicles.

1. Largest Corporate Holder Of Bitcoin — MicroStrategy holds more Bitcoin than any other public company and currently ~10x more than its closest rival.
2. Downside Protection —MicroStrategy outperforms ETF’s and Bitcoin Futures both on Up Days and Down Days.
3. Generated Yield — MicroStrategy generates yield by leveraging cheap debt to increase its bitcoin holdings.
4. Financial Leverage — MicroStrategy uses debt to acquire bitcoin. The more the price of bitcoin increases, the more capital the company can raise to buy more bitcoin and further increase its Bitcoin Per Share, creating a flywheel effect.
5. No Fees — MicroStrategy provides a way for investors to gain indirect exposure to bitcoin without paying management fees.
6. Accretive Dilution — MicroStrategy is actively increasing its Bitcoin Per Share (BPS) by issuing shares to buy bitcoin. As reference, in 2024, the company has increased its BPS by 17%.
7. International Gateway — MicroStrategy offers global investors indirect access to Bitcoin, enabling those who might otherwise face barriers to invest or allowing them to do so in a more tax efficient manner.
8. Deep Liquidity — MicroStrategy's stock is highly liquid, making it easier for large investors to buy and sell without significantly impacting the price.
9. Bitcoin Bank Potential — As the largest corporate holder of bitcoin, MicroStrategy is positioned to become a Bitcoin Bank by offering financial services like loans, custody and investment products backed by bitcoin.
10. Indexes Inclusion — The more indexes MicroStrategy is added to, the more passive investment flows it attracts, the bigger its market cap, the more capital it can raise and the more bitcoin it can purchase, creating a flywheel effect.

$BTC VERSUS $MSTR

$BTC is for people on defense. $MSTR is for people on offense. 1BTC = 1BTC

If you’re optimising for self sovereignty, there is no second-best to $BTC. If you’re optimising for ROI, there is no second-best to $MSTR.

$BTC stores wealth. $MSTR multiplies it.

First you become Orange Pilled. Then you become Red Pilled.

DOWNSIDE PROTECTION

Research produced by @btcjvs demonstrates how MicroStrategy outperforms ETF’s & Bitcoin Futures both on Up Days and Down Days.

“Owning MicroStrategy is better than owning a Bitcoin ETF.” — Bill Miller IV

INTERNATIONAL GATEWAY

Many overseas tax-advantaged savings plans and pension plans cannot directly invest in U.S. ETFs or purchase bitcoin due to regulatory or other constraints. However, they can invest in NASDAQ-listed stocks.

Therefore, as a company with significant holdings in bitcoin listed on the NASDAQ, MicroStrategy provides a viable way for international investors to gain exposure to bitcoin, further increasing the demand for its shares.

LEVERAGING BALANCE SHEET & FINANCIAL MARKETS

Through its balance sheet, MicroStrategy leverages unsecured, fixed, low-cost, long-term fiat money debt that is decreasing in value to buy bitcoin that is increasing in value.

As the value of MicroStrategy’s bitcoin holdings increase, so too does its capacity to leverage capital markets, creating a flywheel effect.

MicroStrategy has low exposure to fiat decay ― all other companies not leveraging bitcoin have high exposure to fiat decay.

CAPITAL LEVERS

MicroStrategy has 4 main capital levers it can use to fund its Bitcoin strategy:

1. Traditional Debt, which involves borrowing at fixed interest rates.
2. Convertible Debt, which involves issuing debt that can be converted into shares.
3. Equity Issuance, which involves selling new shares.
4. At-The-Market (ATM) Offerings, which involves selling shares directly into the market.

“I don’t have any problem seeing how we could raise $100B more capital and then $200B after that.” — Michael Saylor

HOW MICROSTRATEGY’S CONVERTIBLE NOTES WORK

MicroStrategy’s convertible notes are debt instruments that allow creditors to earn interest whilst also retaining the option to convert the debt into company stock at a predetermined price.

If the stock price rises, creditors have the option to convert the notes into equity for potential gains. Otherwise, MicroStrategy repays the debt at maturity.

It’s important to note that conversion removes the liability from MicroStrategy’s balance sheet.

Since MicroStrategy attempts to maintain a target of ~25% leverage on the value of its Bitcoin holdings, each time a convertible note is converted, their leverage falls below their 25% target, which therefore prompts them to enter the capital markets again.

MICROSTRATEGY BENEFITS FROM VOLATILITY

The volatility in the MicroStrategy share price is beneficial for two reasons.

The volatility to the upside benefits them because existing convertible bonds have the opportunity to convert to equity.

The volatility to the downside benefits them because they can issue new convertible bonds at lower conversion prices.

BONDS

A convertible bond is a hybrid security with 6 main elements:

1. Principal: The face value repaid at maturity.
2. Coupon: The fixed interest paid periodically.
3. Conversion Ratio: The number of shares the bond converts into.
4. Conversion Price: The share price at which conversion occurs.
5. Maturity: The date when principal is repaid if not converted.
6. Optionality: The holder decides whether to convert to equity.

The bond market is desperate for positive yield due to persistently low interest rates and inflation eroding real returns, leaving investors with limited options. MicroStrategy is an escape route.

ZERO COUPON & NEGATIVE COUPON BONDS

MicroStrategy has the potential to leverage both zero coupon and negative coupon bonds.

A zero coupon bond pays no interest but is issued at a discount, repaying full value at maturity.

A negative coupon bond requires the investor to pay interest, effectively reducing the bond’s repayment amount.

Both zero coupon and negative coupon bonds appeal to investors who prioritise potential stock gains through conversion, rather than earning regular interest payments.

The more bonds MicroStrategy issues and the bigger it becomes, the greater its credit quality and the better conditions that it can secure. This is all while MicroStrategy is actively contributing to the maturity of Bitcoin as an asset.

MicroStrategy is demonetising the bond market.

MICROSTRATEGY PERFORMANCE OF CONVERTIBLE BONDS SINCE ISSUANCE

5 out of the 6 convertible bonds issued by MicroStrategy to date have outperformed Bitcoin itself.

“MSTR’s Bitcoin derivative products have been met with unimaginable demand - breaking historical records and topping a range of financial metrics such as performance, options open interest, volume relative to market cap, and volatility.” — @BitStrategy21

LOW LEVERAGE RATIO

MicroStrategy attempts to maintain a leverage ratio of ~25% — similar to a homeowner who only finances 25% of a house’s value — which is considered low-risk.

MicroStrategy’s model is highly flexible, giving them options to adjust for market conditions while maximising shareholder value and Bitcoin exposure without excessive risk.

“We try to evaluate all options, we keep our options open, and we ask ourselves the question, is this prudent? And then also, is this accretive? Is this going to be good for our shareholders? And of course, with any discussion of leverage, we don't want too much. We want to just pick just the right amount of leverage, the leverage that allows us to benefit our shareholders without creating undue uncertainty. Sometimes it's appropriate to go fast. Sometimes it's appropriate to go slow. Sometimes it's appropriate to do nothing and wait for better opportunities to present themselves. The nice thing about our situation right now is that, we have all these options and we believe we're structured very, very well to take advantage of opportunities as they present themselves in the bitcoin era of institutional adoption that we see over the coming 15 years.” — Michael Saylor, Q1 2024 Earnings call

MINIMAL LIQUIDATION RISK

MicroStrategy’s long-term debt structure minimises liquidation risk by using fixed-term, low-interest, long-term debt including convertible bonds and senior secured notes with maturity dates years into the future.

This gives the company ample time to service its debt and manage market fluctuations, without the risk of margin calls or forced liquidation.

BORROWING POWER NOT LIMITED BY SOFTWARE BUSINESS

As Saylor has pointed out himself, MicroStrategy’s borrowing capacity is not limited by the earnings capacity of its software business. There are no covenants in the bonds that demand interest to be paid out of operating cash flows.

Therefore, as long as the price of Bitcoin continues to increase over time, MicroStrategy can finance its interest costs, either through debt or equity, without selling a single bitcoin.

LARGEST CORPORATE HOLDER OF BITCOIN

MicroStrategy currently holds more bitcoin (252,220) than any other publicly traded company and currently ~10x more than the next largest holder, putting it in a position to achieve a monopoly.

“The key idea is that one company can be the leading bitcoin bank. To be that company, you need to be 150% bitcoin.” — Michael Saylor

WHY MICROSTRATEGY IS LIKELY A MONOPLY

In the context of bitcoin holdings, MicroStrategy likely has a monopoly because there are very few companies that have the realistic potential to either match or surpass them for a number of reasons.

Firstly, there are very few companies that have the capital or financial leverage required to purchase such a large amount of bitcoin.

Secondly, of the companies that do have the capital or financial leverage required, they don’t have CEO’s with the understanding, passion and commitment — as exemplified by Michael Saylor — required to aggressively and successfully pursue a bitcoin strategy.

Thirdly, of the companies that do have the capital or financial leverage and do have CEOs with the understanding, passion and commitment required, they don’t have the ownership structure that would allow the CEO to unilaterally pursue a bitcoin strategy without broader shareholder approval — unlike MicroStrategy and Michael Saylor, who holds over 50% of voting rights.

Fourthly, even if all the aforementioned criteria are satisfied and another corporate entity does attempt to surpass MicroStrategy's bitcoin holdings, their demand would drive up the price of bitcoin which, as a byproduct, would increase the market cap of MicroStrategy and provide an opportunity for it to raise even more capital and further increase its bitcoin holdings.

Fifthly, smaller companies are behind and cannot scale the bitcoin strategy the way MicroStrategy can while larger companies have a core business and cannot offer pure-play bitcoin exposure the way MicroStrategy can.

Sixthly, Bitcoin's volatility deters most corporations because it introduces financial unpredictability, complicating cash flow management and risk assessment.

“Here’s the reality, MicroStrategy is the most compelling story in corporate finance.” — Dylan LeClair

BECOMING A GLOBAL BITCOIN BANK

MicroStrategy is poised to become a global Bitcoin Bank.

As the largest corporate holder of bitcoin, MicroStrategy can leverage its holdings to offer financial services like loans, custody and investment products backed by bitcoin.

“The endgame is to be the leading bitcoin bank, or merchant bank, or you could call it a bitcoin finance company.” — Michael Saylor

“Actually there is a very good reason for Bitcoin-backed banks to exist, issuing their own digital cash currency, redeemable for bitcoins. Bitcoin itself cannot scale to have every single financial transaction in the world be broadcast to everyone and included in the block chain.” — Hal Finney

WHAT A MICROSTRATEGY BITCOIN BANK MIGHT FEATURE

The introduction of Bitcoin Banks could revolutionise financial transactions by increasing both efficiency and transparency.

Unlike historical banking practices, which often rely on fractional reserves and opaque reporting, Bitcoin banks can provide verifiable reserves, enhancing trust and accountability in the financial system.

ONLY MICROSTRATEGY CAN OFFER BITCOIN BACKED BONDS

MicroStrategy is uniquely positioned as the only company able to issue bonds backed by Bitcoin.

With MicroStrategy’s substantial Bitcoin holdings on its balance sheet, it can offer significant collateral to support debt offerings.

At present, no other company comes close to matching MicroStrategy’s reserves, making it a monopoly in this regard.

“We’re the only company that can actually create bonds backed by Bitcoin. That’s the big idea.” — Michael Saylor

POISED TO DOMINATE THE FIXED INCOME MARKET

Michael Saylor has explicitly stated that he wants MicroStrategy to become the “Amazon of fixed income,” implying he wants the company to become the go-to platform for bond investors by leveraging its Bitcoin holdings.

For context, the fixed income market is currently worth about $100T.

Therefore, even if MicroStrategy’s software business ceased to operate, the company can continue to grow based solely on its capital markets activities, using its Bitcoin treasury as collateral.

“We want to be the Amazon of fixed income.” — Michael Saylor

INDEXES INCLUSION

The more indexes that MicroStrategy is added to, the more passive flows it attracts, forcing indexes to purchase shares regardless of the price.

The more passive flows MicroStrategy attracts, the higher its share price, the more capital it can raise, the more bitcoin it can buy, the more the price of bitcoin increases, the bigger its market cap, the bigger the weighting in indexes, the more passive flows it attracts, creating a flywheel effect.

For reference, see Tesla in 2013 when added to the QQQ and in 2020 when added to the S&P 500.

“I don’t think [@saylor] is speculative attacking the dollar…he’s speculative attacking the U.S. stock market & passive income flows…he’s about to make it into the S&P 500 where he can perform the vampire attack of all vampire attacks...” — @americanhodl8

CRITERIA FOR BEING ADDED TO S&P 500

ADOPTION OF NEW FASB RULES

Before the Financial Accounting Standards Board (FASB) rule changes, MicroStrategy had to report its bitcoin holdings at their lowest value each quarter, reflecting any decreases in value but not increases.

After the Financial Accounting Standards Board (FASB) rule changes, MicroStrategy can report its bitcoin holdings at their fair value (the value of its holdings at the time of each quarter’s reporting).

This will positively impact MicroStrategy’s Net Asset Value (NAV) and NAV multiple, driving its stock price up.

Additionally, the longer they delay in adopting FASB rules, the bigger the market cap of MicroStrategy, the bigger the weighting in indexes and therefore the bigger the passive investment.

BEAR MARKET PROTECTION? (UNLIKELY)

Some people believe MicroStrategy can protect itself/Bitcoin from a bear market.

This is overly-optimistic in my opinion. While I understand the reasoning, at a basic level it ignores two things; investor psychology and global liquidity.

Firstly, fear and greed will always drive irrational behaviour that leads to over-corrections in both bull and bear markets. It’s human nature. If you needed reminding, MicroStrategy traded below its NAV during the 2022 bear market. It’s easy to forget what things are like when sentiment is at its lowest.

For the record, 30-40% of MicroStrategy shares are owned by retail investors — those who are most vulnerable to emotional decision-making and panic selling.

Secondly, global liquidity drives asset prices. For context, global liquidity has a ~97% correlation with the $NDX and a ~85% correlation with $BTC.

$BTC is also one of, if not, *the* most liquid asset, hence why it is so sensitive to moves in global liquidity. Historically, for every ~10% move in global liquidity, Bitcoin has moved by ~45%.

Thus, a fall in global liquidity during a bear market will mean a relative fall in the price of both $BTC and $MSTR.

So, while MicroStrategy may dampen a bear market to some degree, expecting it to prevent one entirely is misguided in my opinion — unless, of course, we get hyperbitcoinisation.

OTHER

The current price of MicroStrategy doesn't fully account for the untapped opportunities that are likely to emerge over time that have yet to be imagined.

THE RISKS

According to Michael Saylor, the MicroStrategy model can only fail if Bitcoin's yield was permanently 0 and volatility was 0. He has also stated that the company’s liquidation line is when bitcoin falls below $700.

SHORTS

“Most of the short interest is convertible debt hedges. There is not going to be a squeeze on those because they hold the call option for the shares through the bond. The actual organic short interest is very small.” — @BenWerkman

COUNTERPARTK RISK (LOW PROBABILITY)

MicroStrategy’s counterparty risk lies in its reliance on debt financing and external capital markets to sustain its Bitcoin strategy. If lenders or markets lose confidence or restrict access to capital, MicroStrategy may struggle to continue growing its Bitcoin holdings.

LEVERAGE RISK (LOW PROBABILITY)

If MicroStrategy becomes overleveraged, it risks financial instability, which could lead to forced asset sales, dilution of shares or difficulty meeting debt obligation.

EXECUTIVE ORDER 6102 (LOW PROBABILITY)

If a government enacts a policy similar to Executive Order 6102, which banned gold hoarding during the Great Depression as a result of the financial crisis, regulators would have the power to either restrict or seize MicroStrategy's bitcoin holdings.

While the probability of this being enforced is low, it will always remain a risk.

OPERATIONAL RISK (LOW PROBABILITY)

MicroStrategy’s operational risk includes the potential loss of its Bitcoin due to security breaches, custodial failures or regulatory seizure.

BITCOIN (LOW PROBABILITY)

Very simple; If Bitcoin fails or suffers an existential collapse, MicroStrategy fails.

KEY-MAN RISK (LOW PROBABILITY)

While on the surface the loss of Saylor may seem like a significant risk, the reality is that whoever replaces him would almost certainty be capable enough to continue the company’s bitcoin strategy. In fact, Saylor has said this himself.

NO CAPITAL GAINS TAX ON BITCOIN

If Bitcoin becomes exempt from capital gains tax, investors may prefer holding Bitcoin directly, thus reducing the appeal of MicroStrategy’s as an alternative vehicle to gain exposure to Bitcoin.

While this is a risk, the reality is that the increase in Bitcoin Per Share (yield) that MicroStrategy generates is likely to offset any savings in capital gains from buying Bitcoin directly.

THE MANAGEMENT

The most effective leaders and organisations have range; they are paradoxical. They are demanding and nurturing, orderly and entrepreneurial, hierarchical and individualistic all at once.

“I learned to go into business only with people whom I like, trust and admire.” ― Warren Buffett

“Good jockeys will do well on good horses, but not on broken-down nags. When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the company that remains intact.” — Charlie Munger

MAIN EMPLOYEES

MICHAEL SAYLOR

Michael Saylor co-founded MicroStrategy in 1989.

In the 1990s, MicroStrategy experienced rapid growth, with its innovative approach to business intelligence software. The company went public in 1998, benefiting from the dot-com boom. Its stock soared and Saylor became known for his ambitious vision for the digital future.

However, the early 2000s brought significant challenges. In 2000, the company faced a financial restatement crisis that led to a sharp decline in its stock price and legal troubles. This period marked a significant setback for MicroStrategy and Saylor, but it was also a turning point. The company refocused its business strategy, which eventually stabilised its operations and finances.

Over the next two decades, Saylor steered MicroStrategy through the evolving landscape of technology, with a focus on business intelligence, mobile software and cloud services. The company made significant investments in R&D and acquisitions to bolster its product offerings and market position.

Throughout his time at the company, Saylor has been a prominent and sometimes polarising figure. He is known for his visionary ideas about technology and the digital economy, as well as his bold business decisions. His leadership has taken MicroStrategy through periods of innovation and growth, as well as times of controversy and challenge, reflecting the dynamic nature of the tech industry.

Many will argue that Saylor has an unmatched understanding of Bitcoin.

Outside of MicroStrategy and Bitcoin, Saylor in an intense guy. One note-worthy story includes taking a date to the office, handing her a book and asking her to read all day while he worked while another story involved Saylor flipping his red Toyota sports car several times on an icy highway, escaping with cuts and bruises and heading back to his job. For fun, Saylor reads two-inch-thick tomes on the history of Western civilization after he gets home from work…at midnight.

Since 2014, Saylor has received an annual salary of $1. His total compensation in 2023 was reported as $799,670, with the majority stemming from other forms of compensation rather than base salary.

Saylor is a genuine rare breed. He is a man of the people.

Michael Saylor was the longest reigning CEO of a publicly traded software company, even managing to survive a devastating -99.8% stock price crash in MicroStrategy from $333 to $0.42 during the early 2000’s dot-com crash.

IS THE BUSINESS FOUNDER-LED?

Founder-led businesses tend to outperform (7%).

• Yes

“The company is going to rise and fall with the CEO.” — Carl Icahn

DOES MICHAEL SAYLOR GENUINELY POSSESS ANY OF THE “BIG 5” COMMON TRAITS ASSOCIATED WITH INNOVATORS?

1. Openness to new ideas.
2. High conscientiousness (willingness to apply themselves over many years).
3. High disagreeableness (not easily dissuaded).
4. High IQ (ability to synthesize information quickly).
5. Low neuroticism (ability to handle stress).

We can make an extremely convincing case that Michael Saylor possesses all 5.

IS MICHAEL SAYLOR DRIVEN BY INTERNAL (GOOD) OR EXTERNAL (BAD) REWARDS?

• Internal

DOES MANAGEMENT THINK LONG-TERM?

• Radically

DOES MANAGEMENT HAVE MEANINGFUL SKIN IN THE GAME?

Yes. Michael Saylor owns approximately 13.9% of MicroStrategy's outstanding shares​.

DOES MANAGEMENT ACT IN THE BEST INTERESTS OF ITS SHAREHOLDERS?

• Radically

"If you own MicroStrategy you’re my partner. You and I are in it together." – Michael Saylor

IS MANAGEMENT DETAIL ORIENTED?

• Yes

IS MANAGEMENT INNOVATIVE?

• Yes

IS MANAGEMENT MISSION DRIVEN?

A leader must be a true believer in the mission.

• Yes

IS MANAGEMENT RATIONAL?

• Yes

IS MANAGEMENT CANDID WITH SHAREHOLDERS?

• Radically

HAS MANAGEMENT DEMONSTRATED LEADERSHIP QUALITIES?

Leadership is the single greatest factor in any team’s performance. There are no bad teams, only bad leaders.

• Yes

HAS MANAGEMENT DEMONSTRATED A HIGH DEGREE OF INTEGRITY?

• Radically

HAS MANAGEMENT DEMONSTRATED A HIGH DEGREE OF INTELLIGENCE?

• Yes

HAS MANAGEMENT DEMONSTRATED A HIGH DEGREE OF ENERGY?

• Yes

DOES MANAGEMENT RESIST THE INSTITUTIONAL IMPERATIVE?

• Yes

ARE INCENTIVE PROGRAMS ALIGNED WITH SHAREHOLDERS?

• Yes

DOES MANAGEMENT HAVE A TENDENCY TO UNDER-PROMISE AND OVER-DELIVER OR OVER-PROMISE AND UNDER-DELIVER?

• Under-promise & Over-deliver

CULTURE

DOES THE BUSINESS HAVE A STRONG CULTURE?

Companies with strong cultures tend to outperform. Strong cultures tend use the word "family" to describe their relationship with others.

Yes. In an extract from an article written in 2,000, the author writes the following:

“Saylor takes his employees’ happiness extremely seriously. To him, MicroStrategy is less a company than a nation of which he is President, and if someone quits he feels it personally, like a lost vote. He keeps track of how many people have left since the company started, and he wonders why they left. Each year, he pays for a Caribbean cruise for his entire staff, to build company solidarity.”

CAN THE BUSINESS ATTRACT & MAINTAIN TALENT?

MicroStrategy can attract the best talent because of the potential financial upside individuals can benefit from by having equity (options) in the business.

THE FINANCIALS

STOCK BASED COMPENSATION

WHAT IS THE BUSINESS’ STOCK BASED COMPENSATION PHILOSOPHY?

• TBC

IS STOCK BASED COMPENSATION LINKED TO MANAGEMENT PERFORMANCE OR STOCK PRICE?

• TBC

IS STOCK BASED COMPENSATION < 15% OF REVENUE?

• Yes

IS THERE NO PREFERRED STOCK ON THE BALANCE SHEET (BUFFET RULE)?

• Yes

“A stock option is both an expense and dilution. To argue anything else is insane.” — Charlie Munger

THE MARKET

VALUATION

If you need to run a DCF analysis, the deal is too thin. Investing is about finding big winners rather than carefully valuing losers.

The most effective way to value MicroStrategy is by using a sum-of-the-parts style analysis.

At a basic level, this is how I think about and frame MicroStrategy’s market cap:

MicroStrategy’s market cap is a reflection of the real-time value of the total number of Bitcoin the market anticipates the company to acquire over time combined with the present value of all future Bitcoin-related profits that the market anticipates the company to generate over time.

So as a formula:

$MSTR Market Cap = RTV Total Bitcoin Acquisitions + PV Future Bitcoin-Related Profits

So using that formula, we need the following information…

• The total # of Bitcoin we think $MSTR will acquire.
• The price of Bitcoin.
• The annual profits that $MSTR will generate as a bitcoin Bank as a % of the RTV of its Bitcoin holdings.
• Discount rate.
• Forecast period.

If we plug in my personal estimates then we get…

PART 1 – RTV Total Bitcoin Acquisitions

1M*$100K = ~$100B

PART 2 – RTV Future Bitcoin-Related Profits

($1T*0.04)*5 = ~$100B

Market Cap = $100B + $100B = ~$200B

…which would imply MicroStrategy is currently undervalued by a factor of ~2.3x.

Now, if on top we add additional premiums for…

• Monopoly in terms of its Bitcoin holdings (+25% of market cap).
• Saylor (+15% of market cap).

…then that would imply a market cap of ~$280B ($200B*140%) which would imply it is currently undervalued by a factor of ~3.3x.

Remember, this a very high-level, general approach to valuing $MSTR.

The more accurate you need your model to be, the less opportunity there likely is and like Buffet says, it’s better to be roughly right than precisely wrong.

NOTES

There are 2 additional notes that relevant here.

• Note 1: My model accounts for “profits” and not “earnings” which is what many traditional analysts use to build a valuation. Historically, company’s trade anywhere between 15-20 times earnings which would imply an even greater valuation to $MSTR.
• Note 2: $MSTR should be evaluated and valued in both fiat and bitcoin terms and considered separately. Only infinite fiat generates a large premium. On a Bitcoin standard, monetary debasement is eliminated, leading to stable purchasing power and a deflationary environment. This reduces the speculative need to pay high premiums for assets.

“We are a growth company. It is not unreasonable to have a 30x-50x multiple [3-5.5x NAV] for that growth” — Michael Saylor

POTENTIAL FUTURE MICROSTRATEGY STOCK PRICE BASED ON CURRENT TRENDS

MicroStrategy is a $10T company.

HOW MICROSTRATEGY BENEFITS FROM A HIGH NAV MULTIPLE

The higher MicroStrategy's NAV premium, the more accretive their bitcoin yield strategy becomes, since they can buy more bitcoin by selling less shares, thus decreasing dilution and increasing Bitcoin Per Share.

So, what's the right multiple to put on a company that generates dividend yield? It could be 10x, it could be 20x, it could be 30x. It comes down to - do you think the yield will continue? And is there a growth rate? MicroStrategy generated close to 18% Bitcoin yield this year. — Michael Saylor

HOW WIDE IS THE RANGE OF EXPECTED VALUES?

• Low
• Medium
• High

“Underpriced is far from synonymous with going up soon…Being too far ahead of your time is indistinguishable from being wrong…It can require patience and fortitude to hold positions long enough to be proved right.” — Howard Marks

“What the wise man does in the beginning, the fool does in the end.” — Warren Buffett

“Being very early and being wrong look exactly the same 99% of the time.” — Seth Klarman

DOES THE BUSINESS BUYBACK SHARES?

Companies that repurchase shares tend to outperform the market.

Historically yes, although this has been less relevant since MicroStrategy adopted its Bitcoin strategy.

"Buying back shares is the simplest and best way a company can reward its investors. If a company has faith in its own future, then why shouldn't it invest in itself, just as the shareholders do?" — Peter Lynch

IS THE RISK ASYMMETRICAL?

• Yes

"[MicroStrategy] still has a massive runway ahead of it [at ~$100). It's our position that we are in the very early innings today of a massive capital repricing event." — Bill Miller IV

“Warren is scanning the world trying to get his opportunity cost as high as he can so that his individual decisions are better.” — Charlie Munger

“Everything is a function of opportunity cost.” — Warren Buffett

“Outperforming the market with low volatility on a consistent basis is an impossibility. I outperformed the market for 30-odd years, but not with low volatility.” — George Soros

OTHER

IS THE BUSINESS SIMPLE OR COMPLEX?

The best ideas are often the simplest (Occam’s Razor).

The price of stock correlates inversely with the thickness of its research file. The thickest files are the most troublesome and will fall the furthest. The thinnest files are the least troublesome and will rise the furthest (Sosnoff's Law).

• Simple

WHAT IS THE PROBABILITY OF PERMANENT CAPITAL LOSS?

• <2%

THE PERSONAL

ON A SCALE OF 1 TO 10, HOW WELL DO YOU UNDERSTAND THE BUSINESS?

• 9

"Extreme patience combined with extreme decisiveness. You may call that our investment process. Yes, it's that simple." — Charlie Munger

ON A SCALE OF 1 TO 10, HOW WELL DO YOU UNDERSTAND THE THESIS?

• 9

"A lot of great fortunes in the world have been made by owning a single wonderful business. If you understand the business and you know what you are doing, you don't need very many of them." — Warren Buffett

DO YOU HAVE AN EDGE IN UNDERSTANDING THIS BUSINESS? IF SO, WHAT IS IT?

To make money, you need to make a contrarian bet that eventually becomes convention.

Yes. The market has yet to wake up to how Bitcoin is transforming money and MicroStrategy is transforming financial markets.

“What you have to learn is to fold early when the odds are against you or if you have a big edge, back it heavily because you don't get a big edge often. Opportunity comes, but it doesn't come often, so seize it when it does come.” — Charlie Munger

DOES THIS INVESTMENT ALIGN WITH YOUR PERSONALITY & INVESTING PHILOSOPHY?

• Yes

“Part of the game of investing is to 'come into your own.' You must find some way that perfectly fits your personality.” — Li Lu

ON A SCALE OF 1-10, HOW MUCH DOES YOUR INTUITION RESONATE WITH THIS INVESTMENT?

• 9

“Very few companies make it through our filtering system as potential investment and even fewer make it into our portfolio.” — Terry Smith

ARE YOU THINKING INDEPENDENTLY & NOT BEING INFLUENCED BY GROUPTHINK?

• Yes

“Part of what you must learn is how to handle mistakes and new facts that change the odds. Life, in part, is like a poker game, wherein you have to learn to quit sometimes when holding a much–loved hand.” — Charlie Munger

ARE YOU EVALUATING THINGS OBJECTIVELY & NOT FALLING PREY TO CONFIRMATION BIAS?

• Yes

“Look, my job is essentially just corralling more and more and more facts and information, and occasionally seeing whether that leads to some action. We don’t read other people’s opinions. We want to get the facts and then think.” ― Warren Buffett

IS THIS A "MUST-OWN” OR “NICE-TO-OWN" INVESTMENT?

The more concentrated your portfolio, the higher your chances of beating the market. Note that you will also endure longer periods of underperformance. e.g. Keynes and Munger underperformed 1/3 of the time.

Since excellent companies are rare, not buying should be the default.

You must attempt to make less bad investments than more good investments.

Buy the best. Ignore the rest.

Bet big on a winner because the less you bet, the more you lose when you win.

• Must-Own

"We are massive bulls on MicroStrategy. It's our largest position." — Bill Miller IV

"Opportunity doesn't come often — so seize it when it comes." — Charlie Munger

“A few good ideas is all you need. And when you find the few you have to act aggressively.” — Charlie Munger

“The one thing all those winning bettors in the whole history of people who've beaten the parimutuel system have is quite simple: they bet very seldom.” — Charlie Munger

“The way to get rich is to put all your eggs in one basket and then watch that basket” – Andrew Carnegie

IS IT A GREAT COMPANY — ONE THAT WILL BE AROUND IN 25 YEARS?

The longer the time period, the stronger the correlation between price and intrinsic value.

Yes. The Lindy Effect would also suggest so since MicroStrategy has been around since 1989.

“The definition of a great company is one that will be great for 25 or 30 years.” — Warren Buffett

WOULD YOU BE COMFORTABLE HOLDING ONTO THIS INVESTMENT FOR 10 YEARS?

• Yes

"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years." –– Warren Buffett

IS THIS BUSINESS WITHIN YOUR CIRCLE OF COMPETENCE?

• Yes

"We know the edge of our competency better than most—that's a very worthwhile thing. It's not a competency if you don't know the edge of it." — Charlie Munger

“Investors who invest outside their circle of competence can find themselves in big trouble.” — Charlie Munger

EVOLVING TIMELINE

• 30th October 2024: MicroStrategy announced a $42B capital plan including $21B ATM equity offering and a target of raising $21B in fixed-income securities.

SORT

RISK: Regulatory Regulators could deem MicroStrategy an investment company instead of an operating company, which could negatively impact the business. Changing laws around Bitcoin could adversely impact the company.

Convertible bond buyers aren’t concerned with interest – they are concerned with the convert feature.

Michael Saylor believes that 1M BTC is the most that MicroStrategy will realistically be able to acquire.

MicroStrategy’s financial engineering stems from its ability to tailor specific contractual agreements (covenants) within its debt instruments to align with the preferences of different classes of investors.

MSTR convertible bonds are conversion price are being issued at a premium on top of a premium (NAV premium)

The BTC Spread is a function of the Equity premium, the convert premium and the bitcoin premium.

MicroStrategy ($MSTR) FAQ

MicroStrategy is the McDonald’s of digital property. The same way that McDonald’s acquires and leverages physical real estate is the same way that MicroStrategy acquires and leverages digital real estate.

Risk: TAM for convertible bonds.

When MicroStrategy trades at a premium to its NAV, it can raise capital to buy Bitcoin and increase its Bitcoin Per Share. When MicroStrategy trades at a discount to its NAV, it can raise capital to buy back shares and increase its Bitcoin Per Share.