MicroStrategy’s Bitcoin king just saw his stash fall to a grim new milestone

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At the MarketWatch Best New Ideas in Money Festival on September 21, Michael Saylor renewed his epic projections for Bitcoin. MicroStrategys founder and executive chairman predicted that the flagship cryptocurrency would regain its peak of almost $70,000 within four years and hit $500,000 within a decade en route to go[ing] to the value of gold.

Its no wonder the flamboyant promoter is talking his book. Hes risking the solvency of his enterprise software outfit on Bitcoins future price (you can read the full story of Saylors Bitcoin saga here). And on October 13, the financial standing of his Bitcoin holdings reached a milestone that underscored the recklessness of his wager.

At mid-morning that day, Bitcoins price dropped to $18,300, close to its lowest level in two years. Saylor has piled 130,000 Bitcoin on his balance sheet at a total cost of just over $3.406 billion. He financed the purchases with a $1 billion equity offering, and four debt deals, a single margin loan, and three bond offerings. The sword hanging over MicroStrategy is the borrowings part: It owes $2.405 billion on the four financings. Thats $18,500 for each of the 130,000 coins in its warchest. When Bitcoin dropped below that number on October 13 to $18,300, Saylors trove was worth less than the debt hes obligated to repay by $26 million. Because Saylor bought the coins for $1 billion or 30% more than theyre worth now, the money from the stock sale went to waste, diluting his shareholders by 12% and getting them zilch in exchange.

In the days that, Bitcoin rebounded more or less in tandem with a tech stock rebound, hitting around $19,400 at mid-day on October 18. The gains put the value of the Bitcoin collection at a slender $117 million or 5% than the debt accumulated from the purchases.

But with the Bitcoin trove hovering around amounts MicroStrategy owes, it enjoys no margin for safety. The debts start coming due in 17 months, and by December of 2025, Saylor will have to repay $855 million, and as much as the entire $2.4 billion by early 2027. If Bitcoins price dives, only by selling an extremely large portion of his coins can Saylor repay the earlier-maturing debt, and wont have enough left to cover what comes due in early 2027. By hugely leveraging a company that pre-Bitcoin had tiny debt, Saylor is putting its existence in peril.

The software business is making almost no money

Before Saylors Bitcoin adventure, MicroStrategy was moderately profitable, generating over $70 million in free cash flow during the good years. But shifting the focus to Bitcoin not only makes the enterprises finances far more fragile, its apparently been a downer for the basic business of software. For the first six months of 2022, MicroStrategy generated just $21 million in free cash flow, or $42 million on an annualized basis. A big reason that number is so slim: the $46 million in annual interest expense MicroStrategy is paying on its Bitcoin loans. In addition, from January to December, it issued a towering $30 million in equity grants, but didnt spend any cash buying back stocks to neutralize the looming dilution, suggesting that its paying employees by diluting shareholders instead of using cash flows from the software business.

The miracle: Even though MicroStrategys Bitcoin, depending on the day, are worth slightly more or less than its debt, it still sports an impressive market cap of $2.5 billion. Since the value of its Bitcoin minus the debt is approximately zero, investors are putting a $2.6 billion valuation on the bedrock software franchise. Thats a multiple of 60 times its annualized free cash flow, not including the drag from big equity grants. And MicroStrategy is radically riskier than its competitors because bad times for the most volatile major asset in history could sink it.

Youve got to give Michael Saylor credit. His outrageous, professor Henry Hill-like salesmanship garners a huge premium for his stock over anything youd get to examining MicroStrategys numbers. But in the long run, its the numbers that will count. And the two that should terrify investors are the wildly fluctuating price of Bitcoin, and the immovable object of the $2.4 billion in debt.

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