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MicroStrategy Is Winning With Bitcoin. Software Is a Side Business Now. – Barron’s

MicroStrategy used all of a $1.05 billion convertible-bond issue to buy Bitcoin.

Courtesy Microstrategy

To see the power of cryptocurrency in action, look no further than the action over the last nine months in MicroStrategy, an otherwise mundane business-intelligence software company in the middle of a business-model transition to the cloud.

In reporting earnings last July, the company indicated that it planned to invest some of its cash in “alternative assets,” listing Bitcoin as an option. The following month, MicroStrategy (ticker: MSTR) said that it had adopted Bitcoin as its primary reserve asset. It said it had purchased 21,454 Bitcoin for a total of $250 million, or about $11,652 per Bitcoin. The current price is a tad under $60,000, for a gain on that initial purchase of about $1 billion.

The buying continued. MicroStrategy in December announced that it made $1 billion in total Bitcoin purchases in 2020, at an average cost of $15,964. And the company said in February that it had plunked down another $1 billion this year, for a cumulative investment of 90,531 Bitcoin, at an average cost of $23,985. The additional stake was funded with a $1.05 billion convertible-note offering: All of the proceeds were used to buy Bitcoin.

Talk about going all in.

That position is now worth $5.4 billion, which accounts for about 80% of the current MicroStrategy stock-market valuation of $6.7 billion. MicroStrategy shares have appreciated about sixfold since management began discussing the company’s interest in Bitcoin.

On Thursday, two analysts picked up coverage of what now is basically a Bitcoin fund with a side hustle in enterprise software.

Jefferies analyst Brent Thill launched coverage with a Hold rating and a target of $700 for the stock price. He described the stock as a “tale of two cities,” Bitcoin and the core business-intelligence software business.

Thursday afternoon, the stock was up 3.7%, to $703.69.

Thill said that backing out the Bitcoin stake, the stock looks fairly valued at about five times estimated 2022 revenue, but he noted that the company is in the early stages of converting its business to the cloud. “While we are positive on Bitcoin and its ability to act as a digital currency, our call is on the core business…we are waiting for evidence of an inflection in the core business before getting on board,” he wrote.

BTIG analyst Mark Palmer picked up coverage with a Buy rating and an $850 target, based on a sum-of-the-parts analysis. “Our valuation assumes that the price of Bitcoin will increase to $95,000 by year end 2022,” he wrote. “We fully acknowledge that MicroStrategy, which last August became the first publicly traded U.S. company to adopt Bitcoin as a treasury reserve asset, has taken a massive unhedged long position on a highly volatile speculative asset. As such, we believe any investor who invests in the stock should do so understanding that their investment is highly correlated with the price of Bitcoin.”

That said, Palmer is obviously bullish on the cryptocurrency market. “We view Bitcoin as a form of digital gold: an attractive, non-sovereign store of value at a time when unprecedented levels of global fiscal and monetary stimulus have heightened investors’ concerns about monetary inflation and the debasement of fiat currencies,” he wrote. “We believe Microstrategy’s adoption of Bitcoin as its primary treasury reserve asset represents a rational action aimed at protecting the company’s inherent value in the long run.”

Write to Eric J. Savitz at eric.savitz@barrons.com