While U.S. spot bitcoin ETFs could reduce the premium at which MicroStrategy shares trade relative to BTC, the company’s shares are set to continue to offer some advantages over such funds, some industry observers say.
Some investors have historically used shares of business intelligence firm MicroStrategy as a proxy for BTC, given the company’s large amount of assets.
MicroStrategy is the largest publicly traded bitcoin holder, with a total of 189,150 BTC held as of December 26.
But the landmark launch of bitcoin spot ETFs last week gives investors a new entry point to more easily gain exposure to BTC.
TD Cowen analyst Lance Vitanza said earlier this month that he expects spot bitcoin ETFs in the U.S. to substantially boost the price of bitcoin and compress the premium at which MicroStrategy trades relative to bitcoin: The results are intended to cause “a material increase in the price of MSTR shares”.
The premium MicroStrategy shares trade for Bitcoin could fall from around 40% to between 15% and 25%, Vitanza added at the time.
As of market close Thursday, MicroStrategy’s stock price was down 18.5% over the past five days. At the time, the price of Bitcoin had fallen about 4.5% in that range.
Vitanza and researcher Jonnathan Navarrete wrote in a Jan. 16 research note that while the ETF’s launch has reduced MicroStrategy’s bitcoin premium, the company’s shares offer unique advantages.
“Chief among these benefits is that shareholders pay no management fees; corporate overhead expenses are supported by cash flows associated with the enterprise software operating business,” TD Cowen analysts wrote. “Indeed, even net of corporate overhead expenses, the company’s free cash flow effectively serves as ‘ ‘reverse commission’ paid not by shareholders, but to shareholders.”
TD Cowen values MicroStrategy’s operations software business at $1.25 billion, Vitanza and Navarrete note. MicroStrategy’s third-quarter revenue from software licensing and subscription services was $45 million and $21 million, respectively.
Dan Weiskopf, co-portfolio manager of the Amplify Transformational Data Sharing ETF (BLOK), told Blockworks that the latest pullback in MicroStrategy’s stock price was “natural” given that it was more than twice its price. bitcoin last year.
He noted that while he believes MicroStrategy founder Michael Saylor and his team have been smart in how they manage the capital structure and buy more bitcoin, the availability of spot bitcoin ETFs gives investors more options.
“The question is whether bitcoin investors through MicroStrategy want to sell and pay [capital gains] buy an ETF,” Weiskopf said. “Currently, the enterprise value valuation looks attractive to us in the short term, assuming 190,000 BTC at the current price and cheap debt.”
The company launched a product in October designed to enable organizations to incorporate generative AI into their data applications.
“My question about MicroStrategy is where they’re going to go with the software business and whether there’s a real AI kicker in the stock,” Weiskopf added.
Jeff Ross, founder of Vailshire Capital Management, said during an X Space on Thursday that he believes bitcoin miners and MicroStrategy will likely outperform BTC in the event of an impending bull market.
“Personally for my clients, I’ve stuck with bitcoin miners but more importantly, I’ve stuck with MicroStrategy,” Ross said. “I think [Saylor] it does a great job of knowing when its shares are overpriced and deploying more shares into the market, then taking that money and buying bitcoin. Knows…when to take out debt at low rates to buy more bitcoin.”
MicroStrategy indicated in August that it had entered into a sales agreement with Cowen and Company, Canaccord Genuity and Berenberg Capital Markets to sell up to $750 million of equity with one or more of those entities. Chief Financial Officer Andrew Kang said the company could use the proceeds for “general corporate purposes,” including buying more bitcoin.
Vitanza and Navarrete said in the January 16 research note that they ultimately expect any future contraction in the company’s premium to Bitcoin to be offset by an increase in the price of BTC.
Segment watchers said they expect the price of bitcoin to rise as greater adoption of spot bitcoin ETFs coincides with the upcoming bitcoin halving.
They added: “A significant premium will continue to be justified, in our view, given MicroStrategy’s lack of management fees, bitcoin’s organic growth… use of smart leverage and downside protection. “