The hottest Bitcoin concept stock – Here are the top ten key questions about MSTR

Under the "Bitcoin frenzy," will the stock price of Bitcoin leader MicroStrategy (MSTR) rise another 70%?

Since implementing its Bitcoin strategy, MSTR's stock price has increased approximately 33 times, while the price of Bitcoin has risen about 7 times. Why has MSTR generated such enthusiasm among investors? On November 26, Bernstein analyst Gautam Chhugani and his team released a report answering ten questions about MSTR.

For example, what risks does MSTR's leverage strategy face? What would happen if Bitcoin crashes?

The Chhugani team stated that MSTR's leveraged strategy for investing in Bitcoin faces risks such as high leverage, debt maturity, and market volatility. If Bitcoin crashes, MSTR may not be able to raise enough funds through the stock market to repay maturing debts and may also face the necessity of issuing more shares, leading to dilution of existing shareholders' equity.

Why should investors choose MSTR stock over a Bitcoin ETF?

The Chhugani team believes that purchasing a Bitcoin ETF is merely a passive way to hold Bitcoin, while MSTR employs an active leverage strategy to build its Bitcoin reserves. Therefore, holding MSTR stock is akin to holding an actively managed leveraged exposure to Bitcoin.

Thus, unlike Citron's short position on MSTR, Bernstein has rated MSTR as "Outperform," with a target price of $600 per share, 70% higher than the current price.

1. Can you briefly summarize MSTR's operating model?

In August 2020, MSTR's cash reserves exceeded $250 million, and the company decided for the first time to invest these funds in Bitcoin. Over time, MSTR has gradually evolved from merely using cash surpluses to invest in Bitcoin to raising funds through capital markets to acquire more Bitcoin.

In the past four years, MSTR has acquired a total of 386,700 Bitcoins, accounting for 1.83% of the total Bitcoin supply, with a total expenditure of $21.9 billion and an average purchase cost of $56,761 per Bitcoin.

This acquisition plan has primarily been funded through approximately $7.3 billion in convertible debt, about $13 billion in equity fundraising, and internally accumulated funds.

Currently, MSTR raises funds through the following methods:

• ATM equity financing: Gradually selling newly issued shares or shares they already own in the secondary market at current market prices through designated brokers.
• Convertible debt: Mainly financing through long-term (5-7 years) unsecured convertible instruments

2. What risks does MSTR's leverage strategy face? What would happen if Bitcoin crashes?

MSTR tends to issue long-term (5-7 years), unsecured, unburdened convertible debt, with exercise prices typically 30%-50% higher than the current stock price.

Bernstein stated, the benefit of this long-term convertible debt is that MSTR has no short-term debt repayment pressure and has enough time to wait for its "Bitcoin strategy" to take effect. Additionally, due to the premium on the exercise price of the convertible debt, it can avoid immediate dilution of shareholder equity.

When the convertible debt matures, if the Bitcoin price rises to the exercise price, MSTR must issue stock, but because the exercise price is high, the dilution effect on shareholders is limited. Conversely, if the Bitcoin price is below the exercise price, MSTR only needs to repay the debt at the lower Bitcoin price, which means that the amount of Bitcoin MSTR repays is less than what was initially purchased with the debt.

MSTR typically maintains a relatively conservative leverage level of about 30% of Bitcoin net assets and flexibly adjusts equity and debt as needed to keep the leverage ratio reasonable and seize more fundraising opportunities. For example, in December 2022, when the Bitcoin price plummeted to $17,000 per coin, MSTR's leverage ratio soared to around 1. To reduce leverage, MSTR began increasing stock issuance to raise funds and continue purchasing Bitcoin. Conversely, when the Bitcoin price rises and the leverage ratio falls below 30%, MSTR takes the opportunity to issue more convertible debt.

However, MSTR's leverage strategy also faces high leverage, debt maturity, market volatility, and other risks. If Bitcoin crashes, MSTR may not be able to raise enough funds through the stock market to repay maturing debt and may also face the necessity of issuing more stock, leading to dilution of existing shareholders' equity.

3. What does Saylor mean by Bitcoin yield? How is MSTR's Bitcoin yield calculated?

Bitcoin yield is a term created by MSTR founder Michael Saylor, used to describe the annual growth rate of "held Bitcoin/diluted equity per share."

MSTR's goal is to provide shareholders with more Bitcoin each year, which is achieved by issuing equity and debt to purchase more Bitcoin. After purchasing more Bitcoin, the amount of Bitcoin corresponding to each diluted share increases.

For example, an investor became a shareholder of MSTR in December 2020, holding shares corresponding to 0.6 Bitcoin per diluted share. After four years, MSTR, through issuing more equity and debt to purchase Bitcoin, increased the amount of Bitcoin corresponding to each diluted share from 0.6 to 1.5. This means that over the past four years, the annual compound growth rate (CAGR) of "held Bitcoin/diluted equity per share" is approximately 25%, which is the Bitcoin yield defined by Saylor and can be simply understood as the annual compound growth rate of Bitcoin per share Due to the booming Bitcoin market in 2024, MSTR is able to expand its capital raising plan, with a Bitcoin yield of 59.3% for 2024. MSTR expects to achieve a 6%-10% annual compound growth rate over the next three years.

4. How to calculate MSTR's premium relative to Bitcoin's net asset value? What has been the historical premium?

Bernstein calculated MSTR's enterprise value (Enterprise Value = Market Capitalization + Net Debt) and excluded the value of its software business, with the remaining enterprise value attributable to its Bitcoin holdings—namely, the market value of Bitcoin assets plus the premium.

By dividing the implied value of Bitcoin held by MSTR by the market value of Bitcoin assets, Bernstein derived MSTR's premium.

According to the calculations, MSTR's stock price is approximately 189% higher than the market value of its Bitcoin assets, while the historical average premium is 61%.

5. What supports MSTR's premium relative to net asset value (NAV)?

Bernstein believes that MSTR's premium relative to its Bitcoin net asset value comes from three points:

• Leveraged Bitcoin investments increase the value of Bitcoin per diluted share;
• The debt strategy is scalable, as interest costs are low (around 0.5%), with longer terms (5-7 years), and no Bitcoin collateral risk;
• Among publicly listed companies, there are limited liquid equity instruments available for large-scale leveraged Bitcoin investments.

Bernstein also derived today's reasonable premium by discounting MSTR's future Bitcoin holdings growth. According to Bernstein, based on the discounted value of the forecast price for 2033, considering probability-weighted scenarios, it is estimated that MSTR has about a 75% long-term sustainable premium.

Here are three scenarios:

1. Base Case:

• MSTR will grow its Bitcoin reserves to about 4% of the total Bitcoin supply.
• Bitcoin continues to experience a four-year price cycle, with a predicted cycle peak of $200,000 in 2025, $500,000 in 2029, and $1,000,000 in 2033, with intermittent one-year bear markets.
• MSTR's debt moderately increases from the current $7.3 billion to $42 billion, with equity financing expected to reach about $35 billion.

1. Bull Market Scenario:

• MSTR will grow its Bitcoin reserves to about 6% of the total Bitcoin supply.
• Bitcoin continues to experience a four-year price cycle, with a predicted cycle peak of $200,000 in 2025, $500,000 in 2029, and $1,000,000 in 2033, with intermittent one-year bear markets.
• MSTR's debt rapidly increases over tenfold, from the current $7.3 billion to $80 billion, with equity financing expected to reach about $66 billion.

1. Bear Market Scenario:

• MSTR's Bitcoin reserves stagnate at 2.5%.
• Bitcoin prices reach a peak of $200,000 in 2025 but then enter a long-term bear market, affecting MSTR's expansion of its Bitcoin strategy
• MSTR was forced to sell its Bitcoin reserves to repay convertible bonds that had matured or were below the exercise price at maturity.

6. Who is buying MSTR's convertible debt? How is MSTR's convertible debt performing?

Bernstein stated that the debt itself has no downside risk, attracting institutional investors optimistic about Bitcoin's upside potential, such as long-term asset management firms and hedge funds, as well as portfolio managers specializing in convertible debt investments, because MSTR's convertible debt has performed exceptionally well.

Year-to-date, MSTR's convertible debt has achieved returns of 90%-221%, compared to a return of 15% for the U.S. convertible debt index.

Additionally, the convertible debt arbitrage department has also profited by holding long positions in MSTR's convertible debt while shorting MSTR stock.

7. When will MSTR sell its Bitcoin? What is MSTR's ultimate goal?

Saylor has publicly stated: "Bitcoin is the ultimate goal of MicroStrategy."

MSTR aims to hold its Bitcoin position in a manner close to permanent capital by maximizing the available long-term capital market tools, with long-term unsecured convertible debt being one example. MSTR has also hinted that the company is exploring long-term preferred stock and fixed income markets as the next source of funding.

Currently, Bitcoin accounts for only 0.2% of the global financial asset pool, while MSTR believes that in the future, Bitcoin will occupy 7% of the global financial asset pool, with each Bitcoin valued at $13 million by 2045, implying a compound annual growth rate of 29% for Bitcoin from now on—this long-term goal is what MSTR focuses on.

8. Are other companies following MSTR's Bitcoin strategy? Why can't large tech companies replicate the Bitcoin strategy?

Recently, some companies have been emulating MSTR's Bitcoin strategy, such as Japanese listed company Metaplanet, U.S. listed company Semler Scientific, and MARA Holdings. These companies are using internal funds and actively raising capital to purchase Bitcoin.

Bernstein believes that small companies with excess cash and declining core businesses may choose to follow MSTR's Bitcoin strategy.

As for large tech companies like Mag 7, while they do have substantial free cash available for Bitcoin investment, their core businesses dominate, and investing in Bitcoin may be insignificant in their overall strategy. For example, Tesla holds $900 million in Bitcoin, but clearly, electric vehicles are Tesla's core business. Furthermore, the core businesses of large tech companies require continuously growing capital expenditures, which does not align with investing in Bitcoin

9. What is MSTR's "21/21 Plan"? What are the expectations for this plan?

On October 30th, while announcing its third-quarter report, MSTR announced a [“21/21 Plan”](https://wallstreetcn.com/articles/3732614?keyword=%E6%B6%A8%E5%B9%85%E6%98%AF%E5%90%8C%E6%9C%9F%E6%AF%94%E7%89%B9%E5%B8%81%E5%9B%9B%E5%80%8D%EF%BC%8CMSTR%E8%A6%81%E5%86%8D%E8%9E%8D420%E4%BA%BF%E7%BE%8E%E5%85%83%EF%BC%8C%E7%BB%A7%E7%BB%AD%E4%B9%B0%E5%B8%81%EF%BC%81**, which aims toraise $42 billion over the next three years through $21 billion in equity and $21 billion in debt to purchase more Bitcoin.

As of now, MSTR has raised over $8 billion in equity and plans to raise $3 billion in convertible debt in the fourth quarter of 2024. Given the booming Bitcoin market, Bernstein expects that MSTR will complete the "21/21 Plan" within the next 24 months.

10. Why should investors choose to invest in MSTR stock instead of a Bitcoin ETF?

MSTR actively adjusts between equity and long-term convertible debt, using leverage to invest in Bitcoin, while maintaining a relatively conservative leverage ratio of about 30% of its Bitcoin net assets.

Bernstein believes that MSTR employs an active leverage strategy to build Bitcoin reserves, thus holding MSTR stock is akin to holding actively managed Bitcoin leveraged exposure, rather than passively holding spot Bitcoin through an ETF.

However, MSTR's stock price premium can sometimes exceed its fundamentals, causing MSTR's stock price to be 2-3 times that of a spot Bitcoin ETF, and investors should be aware of MSTR's premium when trading