According to MSTR-Tracker, MicroStrategy’s (MSTR) net asset value premium for its Bitcoin (BTC) holdings has increased to its highest in three years, reaching approximately 270% as of October 14.
MicroStrategy NAV adds a premium to your Bitcoin holdings. Source: MSTR-Tracker.com
The NAV premium is measured by dividing the market capitalization of MSTR by the value of its Bitcoin holdings. Therefore, a higher NAV means that holding MSTR shares provides investors with a 2.7x higher return than simply holding Bitcoin directly.
Key factors explaining why MicroStrategy stock is trading at a premium compared to its Bitcoin holdings include leverage from its software business and free cash flow.
MSTR leverage creates a premium over Bitcoin holdings.
MicroStrategy uses leverage, using financial instruments such as spot equity offerings (ATMs) and convertible senior notes, to expand its Bitcoin holdings.
As of October 14, long-term debt was approximately $3.91 billion and market capitalization was $35 billion. This shows that the asset is using leverage of 1.1 times its equity.
Simply put, thanks to its use of debt, MSTR controls $1.1 in assets (primarily Bitcoin) for every dollar of equity.
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Let’s say the value of Bitcoin increases by 10%. Without leverage, MicroStrategy’s Bitcoin holdings would also increase by 10% and its stock price would also increase. However, because MSTR uses debt, it controls more Bitcoin than it could with its own funds (equity).
source: X
So, if Bitcoin rises by 10%, the company’s overall asset value increases by about 11%, not 10%. This suggests that MSTR’s NAV premium comes from leverage.
MicroStrategy’s software business
Although often overlooked, MicroStrategy’s software business generated approximately $111 million in revenue in the second quarter and recorded steady subscription revenue growth. This provides a cash flow basis to repay debt and sustain the BTC acquisition strategy.
MicroStrategy’s second quarter earnings key figures. Source: Bloomberg
Although the software aspect is not the primary focus, it contributes to MSTR’s overall ability to operate its Bitcoin strategy without having to sell BTC to cover debt obligations, thus maintaining BTC reserves and NAV premium.
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Lastly, the market’s confidence in CEO Michael Seiler’s aggressive BTC acquisition strategy is high. MSTR has consistently outperformed Bitcoin and most traditional stocks since adopting Bitcoin as a primary financial asset in August 2020.
For example, MSTR has increased 1,700% since purchasing my first Bitcoin. Meanwhile, BTC’s return over the same period was nearly 500%, leading analyst Maartunn to call it “Bitcoin on steroids.”
MSTR and BTC performance since MicroStrategy’s first acquisition in August 2020. source: X
Top U.S. stock indices such as the S&P 500 and Nasdaq Composite have delivered returns of approximately 80% and 70%, respectively.
Investors are willing to pay a premium for MSTR as they expect the company to continue to increase its BTC holdings over time, especially if BTC enters another bullish phase.
This article does not contain investment advice or recommendations. All investment and trading activities involve risk and readers should conduct their own research when making any decisions.