By now you have heard or read, possibly from me just what MicroStrategy (MSTR) CEO Michael Saylor has up his sleeve. After making an appearance at the Bitcoin 2021 Conference over the weekend, the firm announced a private offering of $400 million worth of senior secured debt -- the bonds are considered junk -- in order to add to an existing long position in Bitcoin. That was not MicroStrategy's only communication with the publican on Monday. The firm also let us know that it expects to have to take a $284.5 million impairment charge when it posts Q2 earnings in late July.
MicroStrategy is believed to be long more than 92K Bitcoin (as of mid-May) at an average price of approximately $24,450 like it's not like the position is under water. It's just that the value of these holdings has decreased almost as rapidly this spring as it had accelerated to the upside over this past winter. Oh, one more thing, the rest of MicroStrategy's business is not growing. At all. This firm is a provider of enterprise software aimed at serving mobile and security needs for its clients. This is before it sort of morphed into a Bitcoin holding company. I went back to 2016. Q1 2021, thanks to Bitcoin to some degree, was the firm's only quarter of double digit revenue growth in the lot. In fact, there are just as many minus quarters as plus quarters.
Lay Of The Land
This will be the firm's third bond sale to purchase Bitcoin in less than a year. These notes will come due in 2028 and will be backed by claims on the business and any digital assets purchases (not before) after the deal closes. It's key to note here that as the price of Bitcoin has run higher and lower, so has the share price of MicroStrategy. These shares peaked at $1,315 in early February, up from the mid $100's last summer, and have since fallen to the $458.15 level where it closed last night.
The bonds have been volatile as well. The first was a $550 million convertible note that matures in 2025. That issue still trades well above par, as investors can exchange this debt for stock at a predetermined price. The second issuance, a $1 billion convertible note due in 2027, now trades below seventy cents on the dollar, losing almost two-thirds of its value off of the highs.
Now, remember, this is not your average balance sheet here. As of the end of the first quarter. MSTR had $82.5 million in cash and short-term investments, leading to current assets of $250.8 million. Current liabilities amounted to $283.6 million. Now, total assets came to $2.443 billion, due to $1.961 billion in long term assets. You know what that was. Total liabilities came only to $2.078 billion, including $1.661 billion in long-term debt. Tangible book value per share? Wanna guess? $37.46.
The firm reported for the first quarter adjusted EPS of $1.54, but GAAP EPS of $-11.40. That's right, cash flow from operations printed at $62.7 million, yet the firm posted a net loss of $-110 million. Hmm. That's because cash flow from investing activities printed at $-1.086 billion, while cash flow from financing activities landed at $1.049 billion thanks to the issuance of $1.05 billion in debt. Free cash flow per share? Wanna guess again? $-106.16.
What Do I Think?
There are enough five star analysts with "buy" ratings and elevated price targets on this stock. Citigroup's Tyler Radke is an outlier with a "sell" rating. Readers know that I am not a fan of Bitcoin and I think I see a heavily regulated future in store for independent cryptocurrencies. That said, I can certainly be wrong. In fact, I have been wrong about cryptos so far. Their value is derived from speculation over continued demand for anonymous transactions by the likes of terrorists, drug dealers, money launderers, and hackers. Digital currency mining is incredibly harmful to the environment. Might as well drive a big SUV around all day if that keeps up. Trying to do the right thing on a personal level will not add up to a hill of beans.
That said, the energy drain created by cryptocurrency miners can probably be cleaned up, but not quickly. The criminal element behind the increased demand for cryptocurrencies can probably be cleaned up, but not without heavy, restrictive regulation. Where will demand be then? I don't know. You don't know. The biggest Bitcoin (legitimate) supporters don't know.
I do know this. If I wanted to invest in Bitcoin, I would buy Bitcoin. If I wanted to invest in software stocks, I would find one or two with growing sales and invest in them. I would not invest in MicroStrategy with my money and I could not recommend that you do so with yours. I have rarely, if ever, wanted to buy a stock any less than this one after reading about it and looking over the balance sheet. Strong Sell.
