MicroStrategy’s Plunge Shows Risk of Stock as Bitcoin Proxy

(Bloomberg) — MicroStrategy Inc. Investors who bought shares of the biggest corporate holder of Bitcoin to gain amped-up exposure to the digital asset are getting a painful reminder of its brutal volatility.

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This week is driving home how the leverage the company deploys to buy Bitcoin is a recipe for explosive moves. MicroStrategy sank 16% on Monday, more than 10 times the drop in Bitcoin. It slumped 5.7% Tuesday as the digital token extended a retreat from record highs. The slide pushed this week’s losses to 20%, the stock’s worst two-day drop since 2022, an abrupt reversal after the shares doubled last month alone.

The business software firm has been loading up on the token since 2020, making its stock a proxy for those who want to bet on the biggest cryptocurrency without buying it outright. After selling convertible debt twice this month to finance additional purchases, the company now has roughly $14 billion worth of Bitcoin, more than 1% of all that will ever be issued.

Given MicroStrategy’s market capitalization of about $24 billion, its debt and the approximately $1.5 billion value that many on Wall Street give the Virginia-based firm’s core business, its shares trade at a more than 90% premium to the value of Bitcoin on its balance sheet , according to Bloomberg calculations.

“It creates a financial alchemy that is really quite unique in the market,” said Mark Palmer, an analyst at Benchmark.

What it comes down to now, for investors, is whether it’s a chance to buy the dip in MicroStrategy. It’s a revived bet that Bitcoin will resume its climb, and it also has certain benefits over purchasing Bitcoin exchange-traded funds, an option that’s been available since January.

“We view MicroStrategy as an attractive vehicle for investors who are looking to create exposure to Bitcoin,” said Lance Vitanza, managing director of equity research at TD Cowen. “That’s the only reason to buy MicroStrategy stock, because you want to own Bitcoin.”

Beyond the appeal of the stock given the company’s ability to sell debt to fund Bitcoin purchases, another benefit is that as a share it doesn’t charge a management fee like ETFs. As Vitanza sees it, particularly for investors who are in for the long run and expect Bitcoin to rebound, the premium in the shares makes sense because of those advantages over ETFs. He has a $1,560 price target on the stock, around 10% above the current level.

“When you compound the impact over a long time horizon like 20 years or more and if you assume the underlying value of Bitcoin is going to appreciate rapidly,” he said, “that goes a long way toward justifying the kind of premium that we’ ve seen it in the marketplace recently.”

–With assistance from Tom Contiliano.

(Updates at market close.)

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