MicroStrategy Outperforms Bitcoin with 177% Returns: Is It the Right Time to Invest?

MicroStrategy's Returns Are 3X Higher Than Bitcoin: Time to Buy?

MicroStrategy (MSTR) has become a popular way for investors to get into Bitcoin (BTC/USD). Over the last three years, investing in MicroStrategy has shown much better returns than Bitcoin. MicroStrategy delivered a total return of 177%, while Bitcoin only managed 51%. So, what’s behind this difference?

Currently, MicroStrategy's Bitcoin holdings are valued at around $16 billion. Meanwhile, the company’s market cap is about $34 billion. This means investors see an extra $18 billion in value beyond just its cryptocurrency. But where does this extra value come from?

Breaking Down MicroStrategy's Software Business

MicroStrategy has two main parts to its business: Bitcoin investments and software. The software side focuses on its MicroStrategy ONE data analytics platform. This platform offers business intelligence tools that help users leverage machine learning for custom analytics. However, the software business has been struggling.

From Q1 2023 to Q2 2024, revenue dropped from $122 million to $111 million, a decline of 9%. The software division is currently unprofitable, with losses increasing from $500,000 in Q1 2023 to nearly $19 million in Q2 2024. These figures are based on non-adjusted data. Even when adjusted, the business only reported a net income of $2 million last quarter.

Despite these challenges, some believe the software business has growth potential. Last quarter, revenue from subscriptions and services rose by 21%. However, more than half of the software revenue comes from support services, leading to an overall revenue decline of 7%. On a brighter note, subscription billings—a key indicator of future revenue—jumped by 45%. This suggests there could be better revenue ahead.

Still, with only $2 million in adjusted net income last quarter, it’s tough to justify a $16 billion valuation for the software business, even when considering future potential.

MicroStrategy's Key Value: A Leveraged Bitcoin Investment

Another significant part of MicroStrategy's appeal is its ability to issue low-cost debt to buy Bitcoin. The company has over $3.8 billion in debt, mainly through convertible bonds, with an average interest rate of just 1.6%. This rate is much lower than what individuals would pay, especially with the effective Fed Funds Rate near 5%. Recently, MicroStrategy announced a $1 billion convertible bond offering, which should reduce the average interest rate to 1.4%. This allows investors to gain leveraged exposure to Bitcoin at a much more favorable rate.

This is why many Bitcoin advocates are willing to pay a premium for MicroStrategy over Bitcoin itself. However, it’s important to note that convertible debt can be turned into equity, which poses a risk of shareholder dilution. This dilution could diminish the benefits of the low-cost debt strategy, particularly since nearly 90% of the company's debt is convertible.

Is MicroStrategy's Bitcoin Strategy Adding Enough Value?

To assess the added value of its Bitcoin acquisition strategy, MicroStrategy uses a metric called BTC Yield. After considering possible dilution, the company reported a positive BTC Yield of 12% for 2024, with expectations of 4% to 8% over the next three years. While this shows the strategy is adding value, the question remains: is it enough to justify the company's $16 billion valuation compared to its Bitcoin assets?

At present, MicroStrategy’s valuation is more than double that of its Bitcoin holdings, while the yield it offers is only 4% to 8% compared to buying Bitcoin directly.

The article "MicroStrategy's Returns Are 3X Higher Than Bitcoin: Time to Buy?" first appeared on MarketBeat.

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