When you’re in this business, you make a lot of stock predictions. Some of them become big winners.
But my call in February 2021 that MicroStrategy (Nasdaq: MSTR) was the biggest short in the market has been my best.
I’ve had larger winners. After all, a short can go down only 100%. MicroStrategy, though, is down 80% since I recommended shorting it a little over a year ago.
The day my article ran, the stock closed at $876. As I write this, it’s at $173.
At the time, no one was suggesting this stock was in trouble.
My argument against MicroStrategy was that it had changed to a new “business” model pushed by CEO Michael Saylor. The enterprise software company would still sell software but would now focus on buying and holding Bitcoin.
That’s not a business model. That’s just buying and holding an asset.
Today, MicroStrategy is in worse shape than it was in February 2021.
In the fourth quarter of 2020, MicroStrategy’s only debt was $486 million in convertible notes. Today, the company has $2.3 billion in debt.
Guess what it spent all that borrowed money on? It didn’t invest it in new software development, hires or research. It bought Bitcoin with it. Some of that debt carries an interest rate north of 6%. MicroStrategy diluted shareholders by selling stock in order to use the proceeds to buy more Bitcoin.
As I’ve always said, if you want to own Bitcoin, then buy Bitcoin. But there’s no reason to own stock of a company whose board breaches its fiduciary duty to shareholders by rubber-stamping Saylor’s ridiculous Bitcoin strategy.
The members of its board of directors should be barred from ever serving on a board of a publicly traded company again due to their irresponsible behavior. I know I wouldn’t invest in a company where any member of this board was a director.
As of today, MicroStrategy has not made a dime on its Bitcoin purchases. Its average price is $30,700. MicroStrategy bought $215 million worth of Bitcoin in the first quarter of 2022 at an average price of $44,645. As I write this, Bitcoin sits at $29,418. That $215 million worth of shareholder capital is now worth $142 million.
You don’t need Saylor to do your Bitcoin buying for you. His timing is no better than anyone else’s.
MicroStrategy faces a margin call if Bitcoin slides to $21,000. The company should be able to meet the margin call by pledging more Bitcoin as collateral, but that’s not a good position to be in and it doesn’t exactly instill confidence in Wall Street.
So MicroStrategy has taken on debt – on which it pays interest – and it diluted shareholders in order to acquire a speculative asset.
As a result of the company being distracted chasing virtual currency, MicroStrategy’s software business is suffering.
Over the past 12 months, sales have increased only 3%. When was the last time you heard of a software company in a strong economy growing sales by low single digits? And that’s coming off the previous year that was impacted by COVID-19.
Furthermore, cash flow is declining.
MicroStrategy is barely growing sales and is making less money from the sales it does make.
If MicroStrategy was simply a software company and didn’t have the Bitcoin component, it would still be overvalued, as its business is limping along.
Add in that its fortunes are at the mercy of a speculative asset, and there is a recipe for even more of a disaster than shareholders have already suffered.
MicroStrategy is going lower.