Is It Too Late to Buy MicroStrategy Stock?

Bitcoin is soaring again. The cryptocurrency's price recently passed $90,000 to a new all-time high. It's up by close to 1,000% in the last five years. That has to make MicroStrategy (NASDAQ: MSTR) and its ex-CEO, Michael Saylor, happy. The software company that has turned itself into a Bitcoin investment vehicle is up by close to 400% and is now making more aggressive moves to add to its Bitcoin holdings.

Saylor has said he thinks Bitcoin could hit a price of $13 million by 2045. That may sound laughably optimistic, and investors shouldn't take that exact price target too seriously, but in retrospect, it now looks like Saylor was onto something in 2020 when he started using the funds on MicroStrategy's balance sheet to buy large quantities of Bitcoin. Now, he plans to further step on the accelerator.

Is it too late to get in on MicroStrategy stock, or should you consider buying some shares as a way to get in on the Bitcoin bull run?

Betting big on Bitcoin

MicroStrategy was originally a software business, which it still operates today. However, that segment generates only about $100 million in revenue per quarter, making it insignificant relative to MicroStrategy's market cap of $67 billion. The largest part of that value comes from the Bitcoin it holds on the balance sheet.

As of its latest update, MicroStrategy holds 279,420 Bitcoins, which are currently worth around $25 billion in total. How did MicroStrategy get the money to acquire all this Bitcoin? A few ways. First, by taking out a lot of debt. It had $4.2 billion in long-term debt on its balance sheet at the end of Q3, which it has used over the years to acquire more crypto. Second, the company has set up continuous stock offerings to sell new shares of MicroStrategy common stock. The number of MicroStrategy shares outstanding has risen by 85% in the last three years.

While these numbers might seem sizable, MicroStrategy believes it is only getting started with this Bitcoin strategy. In its latest earnings report, the company proclaimed its new "42" strategy, which is just a moniker to explain that it plans to take out $21 billion in debt and raise $21 billion through secondary stock offerings, all of which would go toward buying more Bitcoin. At current Bitcoin prices, this would raise its crypto holdings from $25 billion to $67 billion. The current market cap of Bitcoin is $1.74 trillion. A $67 billion position would be close to 4% of all Bitcoin in circulation, making MicroStrategy one of the most aggressive Bitcoin investors in the world.

Diverging valuations

The Bitcoin buying strategy has worked so far, but it looks like MicroStrategy's market cap has gotten far ahead of itself. When factoring in its debt, MicroStrategy's net asset value (NAV) is around $21 billion. Yet its market cap is $67 billion -- more than three times its NAV. Remember, MicroStrategy's operating business is largely irrelevant to the calculation of its value. A bet on MicroStrategy is a bet on its ability to buy Bitcoin and the price appreciation of its current Bitcoin holdings. Today, the market is placing a massive premium on these holdings compared to if you just bought your own Bitcoin on an exchange such as Coinbase.

MSTR Shares Outstanding data by YCharts.

Should you buy the stock?

MicroStrategy stock has done phenomenally well in the last few years. It may continue to rise if the price of Bitcoin rips past the $100,000 mark. This doesn't mean MicroStrategy is a good investment, though. Instead of investing in Bitcoin via a stock that's trading at an inflated level of 3 times its net asset value -- which is what you'd be doing if you bought MicroStrategy -- take direct exposure to the cryptocurrency instead. Directly owning Bitcoin means your returns will have a one-to-one correlation with the crypto. A bet on MicroStrategy now is a bet on Saylor managing these Bitcoin assets for you while he's diluting shareholders and taking on mountains of debt. That proposition is a lot more risky.

Of course, you don't have to make any bets on cryptocurrencies. No one is forcing you to buy them just because prices have been going up this fall. But if you want exposure to Bitcoin, it doesn't make sense to get it through MicroStrategy stock. Buy the cryptocurrency directly instead.

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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and Coinbase Global. The Motley Fool has a disclosure policy.