Examining MicroStrategy’s record-shattering $21bn ATM

Historical past, they are saying, doesn’t repeat, however it usually rhymes. Bitcoin-hodling MicroStrategy is a wonderful instance.

In early 2000, MicroStrategy embodied the excesses of the dotcom bubble: Tremendous Bowl ads, a sky-high inventory value of $333, a $25bn market cap, and boundless optimism. Then got here accounting restatements, fines, lawsuits, and a humbling order from the SEC to “stop and desist” from securities regulation breaches. By autumn 2001, with its inventory scraping $0.42, the corporate appeared destined to affix the prolonged roster of tech-bubble casualties.

However company obituaries, like Abe Vigoda’s, might be untimely. The enterprise intelligence software program firm clawed its approach again within the ensuing decade-and-a-half, stabilising at round a $1-2bn market cap. Then, in 2020, co-founder Michael Saylor — the identical govt who presided over the 2000 debacle — remodeled MicroStrategy into one thing new: a bitcoin-based funding car.

Undeterred by sceptics, Saylor has passionately touted bitcoin as “probably the most priceless asset on the earth.” And that’s certainly one of his extra measured pronouncements.

The critics had a area day when bitcoin crashed in 2022. However who’s laughing now?

Bitcoin’s resurgence has despatched MicroStrategy’s market cap hovering to almost $70bn, with the corporate’s share value up over sixfold previously 12 months and 20 occasions (!) within the final 5 years. This 12 months alone it has rallied 438 per cent. Saylor — contemporary from settling a $40mn tax fraud lawsuit final June with Washington, DC — has emerged as company America’s final Comeback Child, the Joe Montana of the Nasdaq.

MicroStrategy has raised capital aggressively to finance its bitcoin purchases, promoting $4.6bn of fairness in recent times and elevating $3.2bn from convertible bonds in 2024 alone. Now it’s doubling down with an audacious $42bn fundraising plan, evenly break up between an at-the-market (ATM) fairness providing program and new debt securities. At present costs, meaning shopping for practically 600,000 Bitcoin — shut to three per cent of the entire provide.

This raises the query: Is that this one other act of hubris, a callback to the Tremendous Bowl splurge of 2000, or one other step in MicroStrategy’s unstoppable rise? Relying in your standpoint, the corporate’s rationale for the $42bn goal is both mystical or meshuggeneh.

As per Bloomberg:

The rationale for that quantity is partially associated to the science fiction collection The Hitchhiker’s Information to the Galaxy the place a supercomputer calculates the reply to the query of life, the universe and every little thing because the quantity 42, in keeping with MicroStrategy Chief Govt Officer Phong Le.

“We imagine it’s a novel quantity with some particular traits. It’s the sum of 21 plus 21,” Le mentioned on an earnings name Wednesday. “Everyone knows that 21 is a magic — a magical quantity on the earth of Bitcoin. There can solely ever be a most of 21 million Bitcoin in circulation.”

The mechanics of the equity-raise advantage a more in-depth look. ATM choices permit corporations to dribble out new shares steadily into the market relatively than by means of conventional placements. It’s a chic resolution for unstable shares like MicroStrategy’s, enabling corporations to capitalise opportunistically on value spikes whereas avoiding the steep reductions sometimes required for giant placements.

It’s additionally an “everyone-welcome” mannequin — all buyers have an equal likelihood to purchase shares, with no favouritism for establishments — and the minimal intermediation arguably aligns with the decentralisation ethos of crypto. Furthermore, administration doesn’t must waste time on roadshow journeys or rubber-chicken lunches with fund managers.

The ATM’s flexibility has made it well-liked with capital-consumptive sectors — corresponding to actual property funding trusts, life sciences and power — as a approach to meet ongoing funding wants. MicroStrategy’s embrace of the ATM speaks to the software’s versatility.

The essential issue is for the shares to have sufficient on-exchange liquidity to permit an issuer to promote in dimension. Roughly talking, you don’t need your promoting program to account for greater than, say, 10-20 per cent of the amount in any buying and selling session. MicroStrategy advantages from big buying and selling stream, making it possible to dump a number of inventory through ATM with out placing undue stress on the inventory. Additionally, blocks of shares are generally bought when a fund supervisor makes a bid, however these are on the full discretion of administration.

ATMs are predominantly a US phenomenon; European and Asian markets are inclined to favour conventional strategies of capital-raising — usually with pre-emptive rights — over opportunistic issuances.

At a sensible stage, few abroad small or mid-cap shares have something just like the liquidity of American ones to make an ATM possible. The Dutch and British governments have used on-market promoting packages to unload shares in banking giants like ABN Amro and NatWest, however solely with pre-existing holdings from monetary crisis-era rescues.

For Microstrategy, the ATM gives a juicy arbitrage play. The corporate’s inventory trades at a roughly 2.8 occasions premium to the worth of its bitcoin holdings, largely because of its leveraged steadiness sheet. So every share bought by means of the ATM primarily represents practically three bitcoins’ price of worth, whereas the proceeds purchase only one bitcoin. Which means that extra inventory will increase the bitcoin per share.

Or as Large Brother would possibly say, “dilution is accretion.”

Two eventualities may disrupt this fandango. First, if bitcoin trades down, the premium to internet asset worth (NAV) would possibly slim or flip to a reduction. Second, the continued issuance of inventory would possibly finally erode the premium, forcing shares right down to the underlying bitcoin worth. However for now, each dangers really feel like a great distance off.

The premium to NAV additionally means MicroStrategy can layer on extra leverage, which in a rising bitcoin market solely widens the premium. To this point in 2024 MicroStrategy has issued 4 convertible bonds for a complete of $3.2bn, locking in low- or zero-cost financing, to purchase much more bitcoin. The excessive volatility and market liquidity of MicroStrategy shares imply that it might probably obtain notably enticing phrases on a convertible.

This technique — borrowing in US {dollars} (which administration expects to be price much less) to purchase bitcoin (which it expects to understand) — is atypical for a carry commerce, given bitcoin’s zero yield. However as MicroStrategy has been capable of situation at zero or sub-1 per cent, its place doesn’t have a lot, if any, unfavorable operating value.

The convertible bond additionally signifies that if the inventory value rises, MicroStrategy can redeem the debt with shares buying and selling at a premium. If not, the corporate should both roll over the debt (possible, however provided that markets co-operate), use money stream from its legacy software program enterprise (tough, given the enterprise misplaced $18.5mn final quarter), or promote a few of its bitcoin (blasphemously sacrilegious).

The serial issuance of convertible bonds in essence represents a same-way leveraged wager on foreign money debauchery.

In brief, MicroStrategy’s “21/21 plan” can pay big dividends (critically, not actually, after all) so long as bitcoin stays excessive and retains climbing. A pointy and extended downturn may upend these assumptions and switch a virtuous cycle right into a vicious spiral.

MicroStrategy’s announcement additionally spotlights a curious contradiction. SEC guidelines tightly prohibit administration from hyping their inventory and require danger components round disclosure.

Saylor doesn’t forecast MicroStrategy’s inventory value, however he usually makes daring predictions on bitcoin’s value which, given MicroStrategy’s holdings, straight impacts the inventory value. Only in the near past he predicted that bitcoin would hit $13mn per coin by 2045, which might make the corporate’s present stash alone price over $3tn, excluding future purchases.

For the previous 4 years MicroStrategy has mentioned it’s going all-in on bitcoin. Now, with its 21/21 plan, it’s most likely time to take its statements critically — and actually.