Investing.com -- In a Tuesday note to clients, Bernstein analysts addressed ten key investor questions about MicroStrategy (NASDAQ: MSTR), highlighting the company's unique Bitcoin-focused strategy and its potential for growth.
With a 49% upside to the $600 price target, they reiterated an Outperform rating on the stock.
1) ‘Can you explain MSTR’s operating model in simple terms?:’ MicroStrategy is primarily a business intelligence software company, but it has redefined itself as a Bitcoin Treasury firm since 2020.
It uses cash, debt, and equity to acquire Bitcoin, amassing 386,700 BTC, which accounts for 1.83% of the global Bitcoin supply.
“MSTR’s Bitcoin strategy can be described as an ‘active leveraged long-only Bitcoin acquisition strategy’,” Bernstein analysts led by Gautam Chhugani said.
2) ‘What are the risks to MSTR’s leverage strategy?:’ MicroStrategy issues long-term convertible debt to fund its Bitcoin acquisitions, with a controlled leverage of ~30% to Bitcoin net asset value (NAV). This minimizes the risk of liquidation during price drops.
For example, When Bitcoin prices fell in 2022, MSTR mitigated risks by raising equity and reducing leverage.
“Similarly, when Bitcoin price surges, the leverage becomes lower than 30% levels, MSTR takes the opportunity to raise more convertible debt,” analysts explained.
3) ‘What does Saylor mean by Bitcoin yield?:’ Michael Saylor defines Bitcoin yield as the annual growth in Bitcoin per diluted share.
Since 2020, MSTR's BTC per share has grown at a compound annual growth rate (CAGR) of ~25%, driven by strategic issuance of equity and debt.
“Investors should simply understand it as CAGR in BTC/share. In Dollar terms, NAV/ share is higher, if dollar price/Bitcoin goes up in the same period,” analysts noted.
4) ‘How do you calculate MSTR premium over Bitcoin NAV?:’ The premium is the implied value of Bitcoin holdings minus their market value. Currently, MSTR trades at a 189% premium, compared to a historical average of 61%.
5) ‘What justifies MSTR’s premium over NAV?:’ According to Bernstein, the premium stems from its leveraged Bitcoin exposure and active management strategy, unlike passive Bitcoin ETFs.
MSTR scales its holdings efficiently through low-interest, long-term debt and capital raises.
“Growing BTC/ share is the core objective of MSTR. Thus, MSTR premium is for future growth of Bitcoin per share, driven by actively managed leverage and capital market operations,” the note states.
6) ‘Who is buying MSTR’s convertible offerings?:’ Institutional investors and hedge funds are key buyers of MSTR convertibles, attracted by the opportunity for Bitcoin-linked upside with reduced risk. These convertibles have significantly outperformed the U.S. convertible index in 2024.
7) ‘When will MSTR sell its Bitcoin?:’ MSTR views Bitcoin as its "end game." The company intends to hold its Bitcoin as permanent capital, exploring innovative funding mechanisms like preference shares to sustain its long-term strategy.
8) ‘Are other companies following MSTR’s playbook?:’ While some companies like Semler Scientific (NASDAQ:SMLR) and Marathon Digital Holdings Inc (NASDAQ:MARA) are adopting Bitcoin-focused strategies, MSTR remains uniquely positioned due to its established track record and scale.
“We think MSTR is in a unique position to offer Bitcoin strategy at scale,” Bernstein analysts said.
“Larger tech companies would not scale Bitcoin due to core business dominance and smaller companies are starting new in capital markets, unlike MSTR with a 4 year track record, including surviving a brutal bear market in 2022/23 and making the most of it.”
9) ‘What is the 21-21 capital raising plan?:’ MSTR aims to raise $42 billion by 2027, split equally between debt and equity. The plan is critical to scaling its Bitcoin holdings, aligning with buoyant market conditions.
10) ‘Why should investors choose MSTR over Bitcoin ETFs?:’ MSTR provides a leveraged Bitcoin play with active management and a unique strategy. However, the company's stock premium over NAV often fluctuates, but the company leverages such market conditions to raise more equity/convertibles to buy more Bitcoin