We came across a bearish thesis on MicroStrategy Incorporated (MSTR) on wallstreetbets Subredddit page by Stunning_Wishbone767. In this article, we will summarize the bears’ thesis on MSTR. MicroStrategy Incorporated (MSTR)’s share was trading at $229.71 as of Nov 1st.
MicroStrategy (MSTR) appears to be significantly overvalued, with its stock trading at nearly a 250% premium to the value of its Bitcoin holdings. This implies that purchasing MSTR stock is effectively like buying Bitcoin at a drastically inflated rate of $245,000 per coin, over three times its current market value. MSTR has maintained a high Bitcoin yield of around 17.8%, which it achieves by issuing new shares at this elevated premium to purchase Bitcoin at a discount. While this yield strategy may appear lucrative in the short term, it relies heavily on the sustainability of MSTR’s premium valuation. If MSTR’s stock price falls, this yield could diminish sharply or even turn negative, especially if the stock begins trading at a discount to its Bitcoin holdings.
Recently, MSTR announced a massive capital-raising plan, aiming to generate $42 billion to fund further Bitcoin purchases over the next three months, split evenly between equity issuance and debt. This large-scale issuance, comparable to the stock dilutions seen with companies like AMC, is likely to overwhelm the retail investor market, potentially causing MSTR’s stock to plummet. Additionally, the new debt will significantly increase MSTR’s leverage, which could become problematic if the stock or Bitcoin experiences a downturn, potentially forcing the company into an emergency equity raise at a discount. Such a scenario would place further pressure on MSTR’s stock and could harm existing shareholders.
Michael Saylor, MSTR’s chairman, appears aware of the risks tied to the stock’s inflated valuation. Over the past three years, MSTR has raised capital through equity offerings five times, a pace unmatched by comparable companies. This aggressive capital-raising strategy, backed by brokers who hold favorable ratings on MSTR, suggests a coordinated effort to sustain the stock’s premium by selling shares to retail investors. This cycle allows MSTR to continually reinvest in Bitcoin, which inflates the apparent Bitcoin yield and draws more investors, resembling the structure of a Ponzi scheme. This reliance on retail investments to sustain the stock price, coupled with MSTR’s history of accounting issues—most notably in 2000, when the stock dropped over 90%—suggests a significant downside risk. Investors should exercise caution as MSTR’s high valuation and capital structure expose it to sharp declines, which could materialize if retail support wanes or the underlying Bitcoin market weakens.
MicroStrategy Incorporated (MSTR) is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 26 hedge fund portfolios held MSTR at the end of the second quarter which was 22 in the previous quarter. While we acknowledge the risk and potential of MSTR as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MSTR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.