Kerrisdale Capital recently released a report questioning the valuation of MicroStrategy shares, stating that the shares have become overvalued. The company argues that the premium at which MicroStrategy’s shares are trading, which represents over two and a half times the spot price of Bitcoin, is unwarranted. According to Kerrisdale Capital, BTC would need to be trading at $177,000 to justify the current premium on MicroStrategy shares.
Despite the recent decline in MicroStrategy’s shares following the disclosure by Kerrisdale Capital, the firm believes that the inflated premium on the shares will likely decrease, presenting an opportunity for a pair trade. Kerrisdale Capital clarifies that their analysis is not based on a bearish outlook towards Bitcoin or MicroStrategy individually, but rather on the distorted relationship between the two entities.
Misalignment of Value Contributions
MicroStrategy’s software analytics division contributes only 3% to the company’s overall value, while much of its Bitcoin acquisitions have been financed through debt and equity offerings, diluting shareholder value. Kerrisdale Capital notes that despite an increase in Bitcoin holdings, the amount of BTC per share has remained largely unchanged in recent years. This misalignment of value contributions raises concerns about the premium on MicroStrategy shares.
Historical Premium Comparison
MicroStrategy currently trades at a 2.6x equity premium to Bitcoin, exceeding the historical average of 1.3x. Kerrisdale Capital highlights that this premium has only exceeded 2x on 6% of trading days since 2021, suggesting an overvaluation. While some arguments have been made in favor of MicroStrategy’s premium, such as its ability to reinvest software business cash flows and lack of management fees, Kerrisdale Capital finds these arguments unconvincing.
Changing Landscape of Bitcoin Investment
Once considered a primary route for Bitcoin investment, MicroStrategy’s appeal has diminished with the increasing accessibility of cryptocurrencies through brokerages and low-fee investment options. Despite MicroStrategy’s CEO Michael Saylor expressing confidence in the company’s appeal to investors, Kerrisdale Capital remains skeptical of the current premium on MicroStrategy shares.
Michael Saylor has highlighted MicroStrategy’s unique offering for investors bullish on Bitcoin, emphasizing the company’s leverage without fees compared to ETFs. With MicroStrategy rebranding as a “Bitcoin development company” and holding a substantial amount of BTC, Saylor aims to accumulate more Bitcoin for shareholders and contribute to the growth of the Bitcoin network through software development and leveraging capital markets. However, Kerrisdale Capital’s critique of the current premium on MicroStrategy shares suggests potential challenges ahead for the company.