The Business Case for Bitcoin

MicroStrategy CEO Michael Saylor compared his company’s performance to rowing a boat against a strong headwind. Is bitcoin, in fact, the only way out?

MicroStrategy said earlier this week that it had purchased $25 million in bitcoin (BTC) in January. CEO Michael Saylor appeared on the crypto podcast “UpOnly” to discuss his company’s plan to amass 125,051 bitcoin between 2020 and 2021.

MicroStrategy (MSTR) is a publicly traded business intelligence and software provider founded by Saylor in the late 1980s, but it is currently better recognised for the $4.7 billion in bitcoin it has on its balance sheet.

It was already one of the largest independent, publicly traded corporations in its field before buying all that bitcoin. It had an enviable 8.29 percent EBITDA (earnings before interest, taxes, depreciation, and amortisation) margin in the trailing 12 months before its first BTC acquisition in 2020, with revenue of approximately $480 million. “It’s profitable, that’s what we are,” Saylor remarked on the “UpOnly” podcast while explaining the company’s status. We enjoy it and will continue to do so. However, you won’t be able to scale it.”

He went on to say that while the company was profitable, reinvesting gains on hiring sprees or boosting marketing spending was not feasible. As a result, MicroStrategy is a cash cow with a positive cash flow on its balance sheet.

That may sound like a good thing to have, but it becomes a problem when those collected dollars begin to lose value due to inflation.

The Federal Reserve’s enormous quantitative easing response to COVID-19 in 2020 helped boost the stock market to new highs, with investors choosing speculative growth stocks like Tesla (TSLA) and tech monopolies like Apple (AAPL) and Amazon (AMZN) (AMZN). Soaring stock prices enable those firms to make larger acquisitions and leverage their valuations to grow their operations with historically low capital, causing their stocks to rise again, and so on.

MicroStrategy was one stock that was not soaring. Even before the pandemic, it had been a slacker for several years. The S&P 500 gained roughly 31% from the beginning of 2017 to the beginning of March 2020, whereas MicroStrategy shares plummeted 31%. MicroStrategy was unaffected by the Federal Reserve’s pandemic QE response. MicroStrategy’s stock continued to decrease as the S&

Saylor compared his company’s performance to rowing a boat against a stronger breeze than one can row in one of his frequent sailing metaphors. Worse, inflation began to rise, and cash cows’ purchasing power was rapidly eroding in comparison to the stock market and other assets they may acquire. Buying bitcoin was thus analogous to turning the rowboat around and sailing against the wind.

MicroStrategy announced the purchase of 21,454 bitcoins for $250 million on August 11, 2020. While Saylor deemed the acquisition defensive, the price of MSTR shares soared 263 percent from $146.63 to $531.64 between August 10, 2020 and the first week of 2021.

Those who didn’t want to own a piece of a corporation that buys bitcoin were given the option to cash out via a $250 million cash tender offer conducted through a modified Dutch auction, which saw roughly $60 million in redemptions.

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More crucially, if all of MicroStrategy’s predictions come true, the company’s purchasing power will be preserved, allowing it to hedge against inflation and maybe beat the broader stock market. Saylor and MicroStrategy’s chief financial officer have both stated publicly in the last week that they will continue to buy bitcoin and use it in a productive way that creates value to shareholders.

While many people are concerned about bitcoin’s volatility and potential to collapse by 50% on a whim, Saylor appears unconcerned. To the criticism, he responds that you can either suffer a slow death, bearing the blows of a depreciating dollar and a booming stock market, or you can fight. If the price of bitcoin can exceed inflation, it is a better investment than cash. While it’s a far shot, MicroStrategy will be in a better position than the vast majority of public companies if bitcoin use becomes mainstream in the near future.

 

Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.

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