Examining MicroStrategy’s record-shattering $21bn ATM

Historical past, they say, doesn’t repeat, however it typically rhymes. Bitcoin-hodling MicroStrategy is a superb instance.

In early 2000, MicroStrategy embodied the excesses of the dotcom bubble: Tremendous Bowl advertisements, a sky-high inventory worth of $333, a $25bn market cap, and boundless optimism. Then got here accounting restatements, fines, lawsuits, and a humbling order from the SEC to “cease and desist” from securities legislation breaches. By autumn 2001, with its inventory scraping $0.42, the corporate appeared destined to hitch 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 manner 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 government 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 invaluable asset on the earth.” And that’s considered one of his extra measured pronouncements.

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

Bitcoin’s resurgence has despatched MicroStrategy’s market cap hovering to just about $70bn, with the corporate’s share worth up over sixfold up to now 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 equity 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, which means shopping for practically 600,000 Bitcoin — shut to three per cent of the full 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 perspective, the corporate’s rationale for the $42bn goal is both mystical or meshuggeneh.

As per Bloomberg:

The explanation 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 all the things because the quantity 42, in accordance with MicroStrategy Chief Government Officer Phong Le.

“We imagine it’s a singular quantity with some particular traits. It’s the sum of 21 plus 21,” Le stated 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 benefit a better look. ATM offerings permit corporations to dribble out new shares step by step into the market moderately than by way of conventional placements. It’s a chic answer for unstable shares like MicroStrategy’s, enabling corporations to capitalise opportunistically on worth spikes whereas avoiding the steep reductions usually 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 trips or rubber-chicken lunches with fund managers.

The ATM’s flexibility has made it common with capital-consumptive sectors — reminiscent of real estate investment trusts, life sciences and energy — as a technique to meet ongoing funding wants. MicroStrategy’s embrace of the ATM speaks to the instrument’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 quantity in any buying and selling session. MicroStrategy advantages from big buying and selling move, making it possible to dump quite a lot of inventory by way of ATM with out placing undue strain on the inventory. Additionally, blocks of shares are typically 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 likely to favour conventional strategies of capital-raising — typically 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 applications 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 presents a juicy arbitrage play. The corporate’s inventory trades at a roughly 2.8 times premium to the worth of its bitcoin holdings, largely on account of its leveraged steadiness sheet. So every share bought by way of the ATM basically represents practically three bitcoins’ value of worth, whereas the proceeds purchase only one bitcoin. Because of this extra inventory will increase the bitcoin per share.

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

Two situations might disrupt this fandango. First, if bitcoin trades down, the premium to web asset worth (NAV) would possibly slender or flip to a reduction. Second, the continued issuance of inventory would possibly ultimately erode the premium, forcing shares right down to the underlying bitcoin worth. However for now, each dangers really feel like a good 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 significantly enticing phrases on a convertible.

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

The convertible bond additionally signifies that if the inventory worth 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 move from its legacy software program enterprise (difficult, given the enterprise lost $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 forex debauchery.

In brief, MicroStrategy’s “21/21 plan” pays big dividends (seriously, not literally, in fact) so long as bitcoin stays excessive and retains climbing. A pointy and extended downturn might upend these assumptions and switch a virtuous cycle right into a vicious spiral.

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

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

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