Summary Another terrible operational quarter of declining revenue. Even with historic losses, management continues to pay itself very well. Any investment in the company remains an unnecessary, Hail Mary bet on Bitcoin. The Quarter MicroStrategy (MSTR) reported another lackluster operational quarter and really bad GAAP loss thanks to mark-to-market losses on its Bitcoin (BTC-USD) hoard. To the extent that any fundamental matters at all, these numbers in no way support the current market cap. I'll also add that the company's unsecured bonds remain below par, implying zero value for the equity. At this point, the software business only matters as a way for the company to cover interest costs on its debt and perhaps a reason for management to get stock compensation (which I'll address below). That said, the software business is still moribund. The company likes to tout its subscriber growth even though it's still less than 15% of revenue. Total revenues were down 1% for the quarter. Even being very generous and using constant currency (without using the same on expenses) revenue growth is uninspiring at 4%. MicroStrategy Revenue Breakdown (Q4 Earnings Presentation) The company makes you work to figure out expenses excluding the noise in the Bitcoin markdowns, but using the below, operating expenses came in at $112 million versus $113 million last year, with some savings on the sales and marketing line (likely a currency benefit). Putting that together means about $20 million of EBITDA for the quarter and $80 million for the year. I think that implies the core software business is worth about $500 million at best. MicroStrategy Expenses Breakdown (Q4 Earnings Presentation) Operating a moribund software business and running an underwater, massive leveraged bet on Bitcoin (even after the rally year to date) doesn't strike me as something that warrants huge compensation to management. This management certainly disagrees. They paid out about $63.6 million in stock compensation in 2022 with Q4 being the biggest quarter of the year at $17 million. Call me crazy, but I believe a management team whose bets on Bitcoin cost investors about $4 billion last year doesn't deserve such riches. Stock Compensation by Quarter (Q4 Earnings Presentation) Effects of the Rally As of the close going into earnings, Bitcoin had rallied about 42% year to date. That move added ~$945 million ($7,005 x 135,000) to the value of the company's holdings. Using $292.13/share (closing price going into earnings) MSTR's market cap grew $1.7 billion ($150.56 x 11.3 million shares) year to date. Somehow every dollar of Bitcoin's rally translated into $1.80 of rally in MSTR stock. I have mentioned MSTR bonds in prior articles. The stock rally has led to a move higher to the mid-$80's in the .75% 2025 convertible bonds (the stock is approaching the conversion price). The 2027 convertible bonds are much farther away from the conversion price and therefore are still in the $40's. More importantly, the 2028 secured bonds, which have a lien on a specific number of Bitcoin and the software operations of the company, are still in the low-$80's and yield about 9.5%. I'll restate that: secured lenders have so little faith in this company's prospects and the security from Bitcoin are demanding 9.5% (almost 6% higher than treasuries) to lend to this company. Despite this concern among bondholders, shareholders have granted the company about $750 million of excess premium from this year's rise in the company's Bitcoin. Risks The risks to playing with any company with a valuation that makes no fundamental sense is that valuation can get more out of whack. If you're going to play from the short side, you have to structure trades that cap your downside in a rally. I also recommend sweeping profits when the stock breaks down. There has been an epic rally in the worst quality/most speculative stocks this year. I believe much of that rally has been driven by a growing view that the Fed would cut interest rates later this year. If interest rates continue to rally, stocks like MSTR might trade higher or at least not break down. If the opposite happens, look out below. Conclusion Nobody who owns MSTR has articulated reasonable justification, in my opinion, why they choose to make a play on Bitcoin with an overleveraged, underwater vehicle that charges high management fees (see the stock comp portion of this article) instead of just buying Bitcoin on margin at a brokerage account at somewhere like Interactive Brokers (IBKR). They certainly can't explain why they are giving $1.80 of market value for every $1 gain in Bitcoin. In my opinion, this stock is for people who neither appreciate risk, valuation or management quality. Stocks like MSTR work when animal spirits have untethered the market from any kind of economic or fundamental reality. It can pay off to just close your eyes, throw money into the market and hope for the best. I consider that a recipe for disaster, but some people treat the market more like a casino than a place to carefully invest capital.
