Software company MicroStrategy (MSTR), which made news last quarter with its purchase of Bitcoins for treasury management, is doubling down on the bet. The purpose of its initial investment was to convert its treasury money into a store of value asset to hedge against inflation.

The Virginia-based company is offering $550 million worth of five-year senior convertible unsecured notes to investors and plans to use the offering’s proceeds to buy more Bitcoin. The company intends to pay an annualized interest rate of 0.75% in June and December each year. It expects to raise $537.2 million from the offering, after subtracting for necessary expenses and accounting for the offering.

Key Takeaways

  • MicroStrategy is offering $550 million worth of senior convertible notes to fund further purchases of Bitcoin.
  • The company's purchase of Bitcoin last quarter resulted in a significant price bump for its share price.
  • Some analysts and commentators have argued that, given MicroStrategy's business fundamentals, the move converts the software company into an asset management company for Bitcoin.

Understanding MicroStrategy’s Bitcoin Bet

This is the first time that a publicly-listed company plans is raising money from the markets for the explicit purpose of purchasing Bitcoin. MicroStrategy has good reason to do so. After its purchase last quarter of worth $475 million worth of Bitcoin, the company’s share price changed trajectory and shot up by approximately 130 percent to reach a peak of $342. As of this writing, the shares are trading at $286. The companies initial investment of $475 million in Bitcoin is now worth over $740 million.

It is difficult to attribute the sudden boost in MicroStrategy’s stock to its financials or business: the company has reported declining revenues and profits over the last three years. While the Bitcoin announcement last quarter resulting in increased “customer activity” for MicroStrategy, the company did not sign new customers, according to Phong Le, MicroStrategy’s chief financial officer.    

The company’s executive team acknowledged the Bitcoin bump during an earnings call, when they spent much time explaining their new treasury management strategy. Michael Saylor, CEO of MicroStrategy, compared Bitcoin alternately to gold and social network Facebook during the call, claiming, at one point, that the cryptocurrency was a “software network that is capable of storing and channeling monetary energy.” 

Metaphysical comparisons apart, MicroStrategy’s Bitcoin bet has turned to be a profitable one. The firm purchased Bitcoin at an average cost of $11,111. As of this writing, it is trading at $18,237.57. MicroStrategy has accounted for Bitcoin as an indefinite intangible asset, meaning it affects their overall earnings only if they decide to sell it.

An Asset Management or Business Intelligence Company?

MicroStrategy's decision to load up on Bitcoin has converted the firm into the equivalent of an asset management firm for the cryptocurrency, according to some commentators. In other words, investors in the company may be attracted more to the prospect of profits from a rapidly-appreciating and dwindling asset than for MicroStrategy’s business fundamentals, which don't seem to have changed materially in the last couple of months.

Not surprisingly, the decision has not gone down well with analysts. Citigroup downgraded the stock to a “sell” after MicroStrategy released its press release. “While the magnitude of MSTR’s initial bitcoin investment (~$450M), was essentially unprecedented, at least this was done with excess cash and at a lower price (~$11K vs. ~$19K). The issuance of new debt to fund Bitcoin purchases is aggressive and may be a deal-breaker for software investors, who may fear they now own a more risky asset management business,” analysts wrote in a note.