Microstrategy shares: an overview

MicroStrategy overview

MicroStrategy's surge in 2024, driven largely by its bitcoin holdings, has propelled its valuation to an astonishing $82 billion. This ascent, coupled with a nearly 500% rise in its stock price this year, contrasts sharply with its historical valuation, which hovered between $1 billion and $2 billion for much of the last decade. However, the company's strategy comes with significant risks. With around half its value tied to Bitcoin, MicroStrategy's stock price now mirrors the cryptocurrency's volatile movements, creating the potential for sharp declines if Bitcoin falters.

The company's underlying software business is dwarfed by its Bitcoin-focused financial operations, and its high premium above Bitcoin holdings signals elevated expectations from investors. While the current bull market in Bitcoin has fuelled optimism, the risk of a dramatic reversal casts a shadow over its lofty valuation and unconventional strategy.

MicroStrategy – valuation

The stock price of software company MicroStrategy is up almost 500% in 2024, primarily due to its large holdings of Bitcoin. This increase has taken its market capitalisation to $82 billion, outranking more than 300 of the S&P 500 at current valuations. From 2011 to 2020, MicroStrategy’s valuation hovered between $1 billion and $2 billion, but its Bitcoin purchases have been the driving force behind the surge to record highs.

In its latest results, MicroStrategy reported revenues of $116 million for its various businesses but recorded a net loss of $432.6 million. The company has essentially become a holding vehicle for Bitcoin, with a software business attached. As of early December 2024, it held 402,000 Bitcoins; now that the price of Bitcoin has reached $100,000, those holdings are worth over $40 billion.

MicroStrategy trades at a significant premium to its Bitcoin holdings. Currently, investors appear willing to accept this premium. Rising Bitcoin prices enable the company to continue issuing new convertible notes to drive further Bitcoin purchases, creating a positive feedback loop.

MicroStrategy – risks

The Bitcoin price is currently in one of its sustained moves higher, which has helped elevate MicroStrategy’s stock price and valuation. While Bitcoin rises, holders of MicroStrategy’s convertible debt can convert their notes to equity and benefit from the ongoing rise in the stock price.

However, this means the stock price is highly correlated with the Bitcoin price. If the Bitcoin price begins to fall, so will the stock price. This has occurred before - in 2021, the price of Bitcoin fell from $64,000 to $16,000, and MicroStrategy's stock price dropped from $81 to $16. At the time, it held between 120,000 and 130,000 Bitcoins. Now, with its holdings more than triple the size, it is potentially even more exposed in the event of a significant downturn in Bitcoin.

MicroStrategy- history and current strategy

MicroStrategy was originally established in 1989 to provide business services. It has also expanded into mobile software and cloud-based computing. The company saw its stock price surge and then crash during the 'dot-com' boom of 1999 and 2000 and remained a fairly minor player over the next twenty years.

The company gained prominence again due to its strategy of buying large amounts of Bitcoin. This move was driven by Michael Saylor, then Chief Executive Officer (CEO) and now executive chairman, who argued that the company should hold some of its cash in Bitcoin as a means of diversifying away from the US dollar and shielding itself from global macroeconomic trends.

Since then, the company has continued to purchase Bitcoin at regular intervals, increasing its exposure to the cryptocurrency’s movements, primarily using convertible bonds (which can be converted from debt to equity) to raise cash for its Bitcoin purchases. Bitcoin’s price gains in the past two years mean that MicroStrategy’s holdings of the cryptocurrency now overshadow the rest of the company’s businesses.