MicroStrategy(MSTR)’s Bitcoin Bet
Degen or pure genius?
Are you wondering how MicroStrategy’s debt-fueled Bitcoin purchased is doing?
You’re at the right place. Below, I will simplify Microstrategy’s Convertible Notes, repayment time period, potential upside, and downside.
According to MSTR’s 10 Q filling. The company has made two separate Convertible senior notes.
“In December 2020, the Company issued $650.0 million aggregate principal amount of 0.750% Convertible Senior Notes due 2025 (the “2025 Notes”) in a private offering. The 2025 Notes are senior unsecured obligations of the Company and bear interest at a fixed rate of 0.750% per annum, payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2021. Holders of the 2025 Notes may receive additional interest under specified circumstances as outlined in the indenture relating to the issuance of the 2025 Notes (the “2025 Notes Indenture”). The 2025 Notes will mature on December 15, 2025, unless earlier converted, redeemed, or repurchased in accordance with their terms. The total net proceeds from the 2025 Notes offering, after deducting initial purchaser discounts and issuance costs, were approximately $634.7 million.
In February 2021, the Company issued a $1.050 billion aggregate principal amount of 0% Convertible Senior Notes due 2027 (the “2027 Notes”) in a private offering. The 2027 Notes are senior unsecured obligations of the Company and do not bear regular interest. However, holders of the 2027 Notes may receive special interest under specified circumstances as outlined in the indenture relating to the issuance of the 2027 Notes (the “2027 Notes Indenture”). Any special interest is payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2021. The 2027 Notes will mature on February 15, 2027, unless earlier converted, redeemed, or repurchased in accordance with their terms. The total net proceeds from the 2027 Notes offering, after deducting initial purchaser discounts and issuance costs, were approximately $1.026 billion.”
For more detailed information about the terms, please head to page 12 of MSTR Form 10- Q fillings.
In short, they have completed two convertible notes offering.
December 11, 2020 — MicroStrategy Completes $650 Million Offering of 0.750% Convertible Senior Notes Due 2025
Feb 19, 2021 — Completes $1.05 Billion Offering of Convertible Notes at 0% Coupon and 50% Conversion Premium with Bitcoin Use of Funds
How much does MicroStrategy need to repay the loan?
For the first offering of $650 million, the interest is at 0.75% per year. And, the payment schedule is as follow :
2022 — $4.74 M
2023- $4.4875M
2024- $4.4875M
2025- $4.4875M
2026 — $655,078M
And, for the second offering of $1.05 Billion with 0% interest.
2022–0
2023- 0
2024- 0
2025- 0
2026–0
2027 — $1.05B
Now, let us look at MicroStrategy’s operating income. As shown below, in their SEC 10-K filings. Their income from operations is negative which means that they lost $13.625 million in the year 2020, $1.002 M in the year 2019. And, in 2018, they were profitable but it was only $3.981 M which means they could not service their debt from their operations even in the best year of the last three years. Now, that’s worrisome!
However, Microstrategy does have more than $59 million in cash and cash equivalents in the bank to service the debt until 2025 before the lump sum payment is needed. Technically speaking, they do have the holding power up until the year 2025.
Now that we have the basics covered, let’s look at the potential upside.
MicroStrategy holds about 105,000 bitcoin at an average price of $26,080 (including fees and expenses) at the time of writing this blog.
Let’s assume in the year 2025 Bitcoin is the price at $100,000. The notional value of the holding would be more than $10B. Putting MSTR’s profit at over $7B. That would be approximately $1.75 B in Capital Gains for 4 years. That is about 14.5x the total revenue generated by MicroStrategy!
MicroStrategy is no longer an analytics company but a Bitcoin Hedge Fund!
Now, what is the downside?
Let’s assume Bitcoin prices continued to plummet to $15,000. And, maintain in that range until 2025. MicroStrategy has two choices, to raise more debt to cover its previous convertible notes or Bankruptcy. However, it’s very unlikely there will be institutions/investors to buy more convertible notes from MSTR.
I believe Michael Saylor the CEO of MicroStrategy made this bet knowing the risk and the potential upside. MicroStrategy’s core I.T business has not seen growth for the past 5 years and it will only get worse as companies like Amazon and Microsoft continue to dominate in the cloud space.
Regardless of what you think, MicroStrategy’s stock price has reached a high of 1272 from $116 after embracing Bitcoin. It has definitely captured the momentum of Bitcoin and elevated itself from a company that has 0 growth to the talk of the town.
It will be interesting to see how this bet will turn out!
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