MicroStrategy's stock soars, but there are cheaper options for investing in Bitcoin

MicroStrategy (MSTR.O) is the world's largest corporate holder of Bitcoin, holding 279,420 Bitcoins. On Monday, the company's stock price rose over 25%, reaching an all-time high, in response to investors' positive reaction to Bitcoin's recent surge and the addition of 27,200 Bitcoins in the past two weeks. MicroStrategy disclosed earlier on Monday that from October 31 to last Sunday, the company raised approximately $2 billion by selling new shares to purchase these Bitcoins. The number of Bitcoins held by the company exceeds 1% of the current approximately 20 million Bitcoins. This increase is one of the largest since the company shifted to a Bitcoin accumulation strategy in 2020. However, the stock remains an expensive way to own Bitcoin: Barron’s estimates that its market capitalization is three times the value of its Bitcoin holdings, nearing historical highs. This figure has risen from about 2.3 times in mid-October and is approaching parity levels by the end of 2023. At the close on Monday, MicroStrategy's stock price was $340, up 26% for the day, setting a new historical closing record. Year-to-date, the stock price has increased more than fivefold. Bitcoin trades around the clock, and as of Monday, it was up about 13% compared to last Friday's trading level, reaching $86,700. Bitcoin prices have doubled this year. Based on the current Bitcoin price, the total value of the 279,420 Bitcoins held by MicroStrategy is approximately $24 billion, while the company's market capitalization is close to $72 billion, based on approximately 210.8 million shares outstanding. The company also has over $4 billion in debt and a software business estimated by an analyst to be worth about $1 billion. We calculate its enterprise value (debt plus equity market value) to be about $75 billion after deducting the software business, which is approximately 3.1 times the value of its Bitcoin holdings. Using the fully diluted shares of 242 million disclosed in MicroStrategy's Monday press release, Barron’s estimates its premium to be nearly 3.5 times. Fully diluted shares include shares after the company's convertible debt is converted into equity. This means that, according to Barron’s calculations, investors are effectively paying about $250,000 for each Bitcoin held by the company, while the current price of these Bitcoins is around $87,000. Barron’s recently noted that buying the stock is an expensive way to gain exposure to Bitcoin. One possible reason for MicroStrategy's recent sharp rebound is short covering. There is a large short base in the company's stock, recently totaling 30 million shares, accounting for about 16% of the float. Some investors may hold both long positions in Bitcoin and short positions in MicroStrategy, hoping to profit from the narrowing premium between MicroStrategy's stock price and Bitcoin. However, as MicroStrategy outperforms Bitcoin, this arbitrage trade may force participants to cover their shorts and buy back Under the leadership of MicroStrategy Chairman and controlling shareholder Michael Saylor, the company's strategy is to raise funds through equity and debt to make large-scale purchases of Bitcoin. When the company disclosed its financial report at the end of October, management stated that it plans to raise $42 billion between 2025 and 2027, evenly split between equity and new debt, primarily to purchase more Bitcoin. Using debt and equity to buy Bitcoin allows the company to increase the number of Bitcoins held per share in a way that benefits shareholders. MicroStrategy introduced a new financial metric called "Bitcoin Yield" in October to measure this. "Bitcoin Yield" is not a traditional yield measurement but reflects the percentage change in the ratio of Bitcoins held by the company to the circulating shares over a specific period. Wall Street analysts almost unanimously recommend the stock. TD Cowen analyst Lance Vitanza stated on Monday, "MicroStrategy's ability to access the capital markets on a large scale reflects the market's acceptance of its announced strategy to buy and hold Bitcoin, as well as its ability to utilize its balance sheet on terms that are clearly favorable to existing shareholders." However, using debt to purchase Bitcoin also carries risks, as the price of Bitcoin may decline. When Bitcoin fell below $20,000 in 2022, the company's debt traded at more than 50% below par value. The average purchase price for the company per Bitcoin is about $42,000. Given MicroStrategy's high premium relative to its Bitcoin holdings, exchange-traded funds (ETFs) like the iShares Bitcoin Trust with a market capitalization of $30 billion may be a better choice for betting on the cryptocurrency market. The premium of MicroStrategy's stock relative to Bitcoin may narrow, leading to the stock underperforming compared to cryptocurrencies