Here’s why MicroStrategy stock and Bitcoin price have diverged

by

As an analyst with over two decades of experience in the tech and finance industries, I have witnessed the rise and fall of numerous companies and their respective stocks. The current situation with MicroStrategy (MSTR) is particularly intriguing, given its unique connection to Bitcoin (BTC).

The recent 21% drop in MSTR stock over the last 30 days, while BTC remains relatively stable, is indeed a significant divergence from their usual correlation. This divergence can be attributed to MicroStrategy’s ambitious plan to issue 10 billion shares to fund new Bitcoin purchases, which, if successful, will significantly dilute existing shareholders and potentially reduce earnings per share.

The market seems to be adjusting its valuation premium for MSTR, as the company appears overvalued compared to its Bitcoin holdings and financial performance. The equity valuation of $65 billion is significantly higher than the value of its Bitcoin holdings ($42 billion), implying an unrealistic valuation for its core technology business.

However, I believe that MicroStrategy’s shareholders are likely to approve the share count increase due to the strong influence and reputation of Michael Saylor, who holds a substantial stake in the company. Saylor’s track record of driving the stock price up by nearly 2,000% over the past five years undoubtedly commands respect from shareholders.

In the coming year, the outlook for MSTR stock will heavily depend on Bitcoin’s performance. A rebound to a new all-time high for BTC could drive further gains for MSTR stock as investors capitalize on the dip.

As for my personal opinion, I find it amusing that MicroStrategy is trying to become more “Bitcoin-like” by issuing shares and potentially diluting shareholders, while Bitcoin itself remains scarce and finite. Perhaps they should consider a limited edition release!

Historically, MicroStrategy’s stock price and the value of Bitcoin have shown a strong connection, given that MicroStrategy has become the largest Bitcoin investor on record.

In the past month, MicroStrategy’s shares have fallen by about 21%, whereas Bitcoin (BTC) has only decreased by close to 2%. This represents a substantial difference, since MicroStrategy’s stock price usually follows the trend of Bitcoin.

This year, the stock’s value has increased more than threefold (320%), compared to Bitcoin’s growth of 120%. Its superior performance relative to Bitcoin, coupled with the absence of management fees, has sparked interest among investors who see it as a potentially superior choice to Bitcoin and Bitcoin-related ETFs.

Mastercard (MSTR) has been amassing Bitcoin throughout this year, now owning approximately 446,400 Bitcoins with a value exceeding $42 billion. However, it’s worth noting that this Bitcoin holding is significantly smaller compared to the company’s market capitalization, which stands at more than $65 billion.

As a researcher, I’ve observed an apparent divergence in trends between Bitcoin and MicroStrategy’s stock. This disparity seems to stem from MicroStrategy’s declaration of intentions to issue approximately 10 billion shares, aimed at financing future Bitcoin acquisitions. Their long-term ambition is to amass a staggering $42 billion through equity and fixed income offerings by the years 2025 to 2027.

As reported by Yahoo Finance, the firm currently has approximately 225 million shares outstanding, which translates to an increase of over 4344% if more shares are issued. This process of capital raising through equity issuance tends to dilute the holdings of current shareholders, lowering their ownership stake in the company. For a profitable business, this can also lead to a decrease in earnings per share.

In the comprehensive discussion on the X forum, The Kobeissi Letter delineated the financial dilemma facing the company. Increasing equity would diminish the holdings of current stockholders, but if the share renewal plan is unsuccessful, MicroStrategy may not have sufficient resources to pursue its Bitcoin buying strategy any further.

As a seasoned investor who has been through many market cycles and seen my fair share of ups and downs, I have to say that something seems off about MicroStrategy’s performance this year. Known as the go-to “leveraged” Bitcoin play of 2021, its recent performance raises some eyebrows.

Over the past month alone, Bitcoin has seen a modest +2% gain, yet MicroStrategy (MSTR) is currently down nearly -50%. This disparity between the two is striking and makes me wonder what’s happening behind the scenes.

I have always believed in doing my due diligence before making investment decisions, and I encourage others to do the same. Let’s delve deeper into this situation and see if we can uncover any insights that will help us make informed decisions moving forward.

— The Kobeissi Letter (@KobeissiLetter) December 30, 2024

Regardless of the obstacles, it’s highly probable that MicroStrategy’s shareholders will endorse the increase in share count. Michael Saylor, a prominent proponent of this strategy, possesses approximately 46.8% of the existing shares. Shareholders have great admiration for Saylor, as they have observed the stock skyrocket by almost 2,000% over the past five years.

MicroStrategy stock valuation reset

Moreover, the drop in MicroStrategy’s stock price might signify the market correcting its overvaluation assessment of the company, as it is viewed as excessively expensive by certain investors. In detail, MicroStrategy has a market capitalization of $65 billion, which is significantly higher than the $42 billion worth of Bitcoins it owns.

It seems that the assessment suggests a valuation of approximately $23 billion for their core technology business, but given the latest figures, this appears improbable. In the last quarter, their software business recorded sales of $129 million and incurred a net loss of $8.4 million.

As an analyst, I foresee the future of MicroStrategy (MSTR) stock in 2025 being significantly influenced by Bitcoin’s trajectory. If Bitcoin manages to rebound and reach a new all-time high, it could potentially trigger additional growth for MSTR shares as investors seize opportunities presented by any potential market dips.

Read More

2024-12-31 18:26