Transcription
Okay, let's do MicroStrategy; we haven't done that one yet. This crackhead company... I should tweet that I'm doing MicroStrategy; that'd be kind of funny. How to do? We're going to do our best, but yeah, it's a good question: how do you value MicroStrategy? It's definitely a good question. No, I'm still short Sava; I shorted a little more today, actually, when it was up around 4. Okay, this will be entertaining—maybe an influx of people. We'll see.
Analyzing the enigma known as MicroStrategy... I guess X doesn't like it when you tweet a link either, so let me see if I can do this. I need a new keyboard too. Let's see. Okay, good old MicroStrategy. I hope you guys can see my screen okay. I'm on a Mac laptop, so I'm in dire straits over here, at least from a financial workflow perspective. I also want to talk to some of my convert friends and see what they think, 'cause this whole thing is fueled by convertibles, right?
All right, I also want to know what the difference between their Class A and Class B shares are, but I assume that they're both economic shares. So this is a 79 billion market value; do I have that right, chat? Digital assets—okay, so that counts to me as cash, but we'll do like a, I don't know, Bitcoin section maybe so we can actually just calculate that price more easily. Um, see what's going on here. Yeah, Macs are really painful. Okay, so 4.2 in. I got 79 billion. Oh, are you guys [Music] converting? Is there some weird thing you're doing? Well, they're using debt to buy the Bitcoin, which is fine; that's their kind of game plan.
Okay, so here's the number of Bitcoin held, so we can kind of use that to—uh, just give me a second—we can use that to estimate the present value of every second of it. But okay, so 252,000 Bitcoin. Do I have this right? So they have $23 billion worth of Bitcoin. I think I have this right—yeah, 23 billion worth, but they have it on the books at, I guess, carrying cost. So it's seven... I'll look at the news; relax, I know I'm just looking at the 10-Q. Believe it or not, I know how to analyze the stock; I know it's crazy.
Okay, so real cash is 46,343,186,242,11. Deb. So the enterprise value is 75 billion. You're paying $75 billion more than the value of MicroStrategy. Okay, let's look at the 8-K. Okay, so their 2029 zeros 55% premium, and this is 1119, and this is three [Music] billion. Okay, so there's another five million shares sold, and that raised 2.46. Okay, so let's see: 2.46 and three or 2970 minus 5400. Okay, that makes sense, and now they have 386,700. Okay, so you're paying $62 billion extra for MicroStrategy. What is the BTDC yield? We do have to add the older converts to the extent they [Music] convert. There is a method for this called the treasury method.
Okay, so you're paying $81 billion to buy—let me see here—okay, so it's about, it looks like, $81 billion to buy $37 billion of Bitcoin. So another way to put it, I guess, would be the value of the Bitcoin per share on MicroStrategy is $176, so it should be trading at $176. I'm trying to think of a creative way to think about this that makes it make sense, because right now, I'm having a hard time having it make sense, but I'm trying to be creative. So even if you assume his cost of capital is zero, okay? So let's assume this is a different world—this is Sailor World. Okay, we're going to imagine in Sailor World he can sell shares. Okay, this is interesting; he can sell all the shares he wants of MicroStrategy at a 2X price. Let's assume this is a crazy Sailor World, okay? So his cost of capital is lower than [laughter] zero. That's not sustainable, obviously, because let's say you're a lender, okay? You're a convertible bond arbitrager. I know guys that run convert funds.
So the way convert funds work, in case anybody doesn't know, it's a little more complicated than meets the eye. So in essence, you are buying this convertible, and I've sold convertible bonds with Barclays; they did a great job, by the way. If you need a good bank to run a convertible offering, they're good. So your convertible notes have some kind of coupon, and it's usually not zero, but it's very, very low. And so this allows smaller, shittier companies to sell debt, but it's not really debt; it's got debt character and equity character, so it's somewhere between debt and equity depending on a few different things.
So when you have a really low coupon and a low conversion premium, let's say you have a $1 stock, okay? And you're the CEO of this company, and you're sick of sh— and this is, you know, let me just show you kind of how my company worked. And you have 20 million shares outstanding, so you have a $2 billion company, and you need cash for something, but you're sick of selling shares. I could go and sell 2 million more shares on my stock with Goldman Sachs or somebody like that and raise 200 million and put that on my balance sheet, right? Let's see; my cash is running low. I have 50 million, and I want to raise 200 million. So there are a few options: I can sell 2 million shares of stock, but now my shares outstanding go from 20 to 22, and I don't like that dilution. My shareholders don't like it; my EPS might go down.
So instead, I could borrow money. So if I borrow money and I'm sort of this struggling midsized company, no bank is going to really give me debt unless I have a better kind of earnings profile and stuff like that. So a convert is kind of in between. Otherwise, if I were him, I'd just borrow debt or do an asset-backed loan. But in any event, the convert has a mix of—oh yeah, my face is way too big. The convert has a mix of equity and debt, so the convert is senior, so it is a serious claim on the assets of the company typically. So if you don't pay the convert coupon, you go bankrupt. So that's a really important thing to keep in mind: convertible notes are debt; you don't pay, equity's worthless. Many companies have gone bankrupt using convertible debt.
So in any event, again, in the picture of a small company like at the time my pharmaceutical company, we sold, I want to say, around 100 million of converts. And the nice thing is the coupon is a lot less than debt you could raise. So if you raise the debt yourself, it would be like 7% or 11% or something like that. So with converts, you can get this really low coupon, which is really nice. Now, the conversion price is interesting. So I have a $100 stock here; we can make the conversion price $130. So why would somebody buy this? Well, if you buy this as an institutional holder, let's say we do this $100 million offering, and we pick a bank that we like, with Goldman Sachs. Goldman Sachs is going to make like 3 million on this, so I receive 97 million. The company does, so my cash would go up from 50 to 147, and this is debt, though, so I have 100 million in debt now.
So why would a hedge fund or someone like that own this? Well, it's very interesting. So from the hedge fund's perspective, so I'm sort of done here, right? I'm happy; I got my capital. Every quarter, I have to pay this coupon, or every half year, and it's only $2 million a year of interest, where normally a bank loan would be like 7% or 10%. So the hedge fund that buys this convert has to think about this pretty carefully. So the hedge fund is earning the 2% coupon per year, right? So they're getting, you know, 2%, and they're getting part of that 2 million in interest, but that's not very attractive in almost any circumstance. And the reason that they're doing this is really for the conversion feature. But is the conversion feature really that valuable? Because the stock's at 100, and the convert trades at—the convert price is 130. So if the stock went to 140, this would be a very valuable bond to have because now you can convert it and earn a serious return. So you have this optionality; you're protected on the downside because you're senior secured. So if the company doesn't pay you, it goes bankrupt. But at the same time, if the company's stock rises dramatically and you have like a five-year or three-year conversion option, so let's say the stock goes to 200, you can just forget that this is debt and convert the stock.
Now, another thing you could do, and this is what hedge funds typically do, is they'll sort of short the stock. And so what they'll do—and this is called convertible arbitrage—so they'll buy the convert and short the stock. And this is kind of probably what's going on with MicroStrategy to some extent. And there are different ways and reasons you want to do this. So lots of different ways to sort of decide how to hedge at significantly higher than the conversion price. Most hedge funds will hedge the entire thing, but selling short allows you to have this sort of win-win. So in a bankruptcy, the convert is probably worth something because it's senior secured, but your short is going to make a lot of money if the company goes bankrupt. So you're sort of trying to mix shorting the stock with owning the senior secured. So it's a very interesting dynamic, and if you play around with a spreadsheet, you'll sort of get a sense for, okay, why and how would people do this?
So as I mentioned, MicroStrategy is an 81 billion company with $36 billion of Bitcoin—really 32 after you take out the debt. So why are we paying—um, we should really subtract this as well—why would we pay $390 for $156, right? That is literally the deal you're making. Well, companies aren't static, right? They're dynamic and fluid things; they tend to change. And so, in Sailor World, imagine we live in a world where Michael Saylor can issue stock at a 100% premium with no interest. What would happen then, and how much could he issue? So this is the pre—this is the real world, and now we're going to take a trip into Sailor World and see what happens.
So instead, in Sailor World, he's going to issue debt. So we're going to put the debt here, and we're going to say we're going to make this $50 billion in debt—okay, really, really crazy amount—and he's going to buy $50 billion of Bitcoin. Well, usually when you lend the money, you also short the stock, so there's a weird parity there now with 0% coupon. [Music] I'm not sure shorting the stock makes much sense, so you're trying to find a delta that you're willing to short the stock at. Anyway, let's keep going. Okay, so there's $50 billion raised, and he's willing to buy $50 billion of Bitcoin. So how much Bitcoin is that exactly? Okay, so that's 500,000 Bitcoin. So this is a pretend exercise where he raises 50 billion in debt and buys 50 billion in Bitcoin.
Okay, so let's say the share price stays the same. Let's do the conversion in a second. In this scenario, let's say Bitcoin's price stays the same. In this scenario, he's got $86 billion of Bitcoin but 4 billion in debt because he paid for the debt. And so the enterprise value of the company actually does not change. Now, the secret sauce here is what about the converts? What about if this debt converts to equity? So the $50 billion in converts—how would they convert? Well, let's think this through. In this world, we're doing this at a 100% premium, so it's really a wacky kind of premium—$780. The bondholders can convert $50 billion in our pretend world here, and you'll see why I'm doing this exercise in a second, and that would be that many shares—64 million more shares. So we can remove that from here, the debt, because it's no longer debt, and it just converted to shares. So if we do that, I'm just going to do it manually: plus 64. Okay, so the market cap rises. The holdings all stay the same; there's no more debt, though, and the enterprise value of this, interestingly, is better, but it's not that much better, and it doesn't make it long.
So this means that if Saylor is able to sell a convert, a zero-coupon convert of $50 billion at 100% premium—not at a 50% premium, which is what he has access to now, but 100% premium—you still have an overvalued company. The shares outstanding would go up, I guess, at 780. You would again have this massive premium. So the stock, even at 390, would still be, you know, sort of overvalued. So basically, the share price is implying that he's either going to successfully sell $50 billion of converts. Keep in mind he just did three, so he'd have to sell $50 billion in converts at double the stock price for this to kind of make sense and not be a good investment, but kind of not lose your shirt. So I'm sure he'll keep selling convertibles, but can he sell $50 billion at that premium? Right now, he's selling it like a 50% premium.
So let's do the math: if he does it at a 50% premium, which is a lot more diluted, needless to say, okay? And you basically would not get it to be a—obviously, it's less of a long, the less of a premium he can sell, but it's a fairly ugly situation because you're still overvalued by, I don't know, like 30%. Okay, so the really interesting thing to do here—the dumb thing is to say, okay, why am I buying MicroStrategy for $156 worth of Bitcoin for $390? Anybody can do that math. But the question is, what is the implied cost of capital for MicroStrategy such that the price makes sense? And at this price, even a $50 billion convertible would not—at a 50% higher price—would not make MicroStrategy long. The only reason you would buy MicroStrategy is because he's selling converts for double his stock price, 50% higher than his stock price. And to the extent Wall Street keeps believing this, he has an advantage over you. He is paying for Bitcoin with something that's 50% higher than the current price of the stock.
But there are a few issues with this, which is there's only so much demand for convertibles. The more convertibles you sell, the less demand there is for them. So here he sold $3 billion converts, and even if he sold 50 billion more, I don't think that he would have enough Bitcoin for it to be long. At some point, he actually has too much Bitcoin, and it kind of becomes an overhang, right? Does he want to own 10% of all Bitcoin? That seems ill-advised. So anyway, let's see. Let's pretend he does $100 billion of converts. Now, this is the amount of debt like an Apple would have, or maybe even more. So this is like—it reminds me of AT&T and Verizon, like the biggest debt issuers in the world have around this much debt issued. So like, you're really straining maybe the capital markets and the convert market. And by the way, that's in traditional debt, so converts is a smaller section of debt and finance where the biggest convert funds just can't handle all this paper. So like, I'm not sure these banks that run convert desks or convert funds want to own this much MicroStrategy.
But let's assume he sells $100 billion of pieces of paper, whether in bulk or in multiple tranches, and it's a 50% conversion premium. Okay, so this is getting a little stupid, but let's try it and see what happens. So in this case, he gets to buy a million Bitcoin, which is a remarkable amount. And only in this scenario is MicroStrategy even a break-even. So he would—okay, it would be worth $455, so it's a little undervalued if you assume $100 billion. It's really overvalued if they sell $50 billion. So something like $75 billion, I guess. Oh, I didn't even add the new shares. Never mind; hold on. A little math error here; forgot to add the new shares. Okay, it's still overvalued even—okay, it's fairly valued if they sell $100 billion. So they need to sell $100 billion of converts and buy Bitcoin at this price with that money for the stock to be worth the current share price.
Now, you have to ask yourself—I sometimes call this like a reverse DCF or an imputation—so you can compute a fair value, or you can impute it. And I think sometimes the imputation is a lot more intelligent than anything else. We don't know what the future price of Bitcoin will be. The future price of Bitcoin could go down. I hate to tell you guys that; I like Bitcoin. But if Bitcoin's price goes to 50,000, which it very well may, you know, you've got a bigger problem on your hands. If it goes to 125,000 or 200,000, then sure, you definitely are in good shape. So you have a leveraged Bitcoin position, but let's just assume, you know, this is the price [Music]. And by the way, you can hedge this with Bitcoin, right? So it does matter. It's very easy to hedge this with Bitcoin. You can literally just hedge it, and you will make money if you short Bitcoin or long Bitcoin and short MicroStrategy, you know, at the right ratio. You have to determine the right ratio, but it should be a perfect hedge. And if not, you can arbitrage it and make some money.
But think about this point, which is at current prices, you would have to sell $100 billion in converts and buy a million Bitcoin at this price for the shares to be break-even. Now, another way to look at it is, back to the real world, is what if Bitcoin goes to 150,000 per Bitcoin? It's actually still overvalued. What is the price that gives you fair value? It's something like 200,000 per Bitcoin, which, you know, could happen. It would be 220,000 BTC. So you can just long Bitcoin and short MicroStrategy. I mean, it seems pretty simple, you know? I mean, I have no position really on whether or not Bitcoin will hit 220,000; it very well may. The bigger problem here is that the convertible bond market just isn't that interested in, I don't think, buying this paper forever. So it's funny; I don't even have to look at a balance sheet or an income statement. Well, I have to look at a balance sheet, but I don't have to look at an income statement or cash statement for this. It's literally one asset, right? And you know, there's this sort of max pain theory in the market where, like, the market will take a path that causes the most pain. And if you—I don't really believe in fate or anything, but like this guy also blew up in the dot-com bubble. It would be such a tragedy if Bitcoin went to like 10,000, and he was forced to sell it all. I don't know; I would short it. I would short it and buy Bitcoin as a hedge, but you have to do it in the right ratio. It might be a 2X Bitcoin, 1X MicroStrategy. I don't know that it's [Music]. I don't know that it's an even trade because you're sort of shorting a leveraged version of it. So you'd have to short one share of Micro, say $1,000 of MicroStrategy, and long $2,000 of Bitcoin, and you would have to delta hedge. And so you'd have to change that ratio as prices changed, but I think that's about right.
Also, if you're just bearish on Bitcoin, MicroStrategy is a better way to short—a much, much better way to short [Music]. Yeah, so that's it. That's, I think, all I got on MicroStrategy for now. I'll have to sleep on it and think more about what it means. But basically, the guy has a cost of capital advantage, right? You and I have to borrow money and pay an interest; he doesn't. And he can convert his debt into his stock, which is just pieces of paper that don't mean anything. And so he can kind of buy Bitcoin for free if Bitcoin goes up. Kind of one way to look at it. It sounds like he's hesitant to do what I'm describing, which is to leverage up and sell a lot of converts. But, of course, I think Wall Street would be worried that, okay, the only collateral I have is Bitcoin, which may or may not be useful if it drops; it's not so useful.
So another way to think about this is, okay, if he's going to be patient, then one of two things have to happen for the stock to make sense: either Bitcoin has to rise, either gradually or all at once; doesn't matter really. Bitcoin has to rise quite a lot, or—and I mean, that's really it. If that doesn't happen, the news flow for MicroStrategy will slow down basically, and he won't be able to announce any large new Bitcoin purchases, which is reflexive on the price of Bitcoin, right? One of the reasons Bitcoin may be up is you have a guy out there bidding for billions of dollars of it. So there's a little tiny bit of reflexivity in there. So if Bitcoin stops going up, it may start going down, or going up, you know, the second derivative drops, I guess, because he can't announce more purchases. And if you're investing in this stock for investor psychology reasons, that's a bad thing. If he can't buy more Bitcoin, but he needs Bitcoin to go up to buy more, I think there's a word for that. But regardless of that word, I don't know; it's not a zero or anything. But if Bitcoin dropped at all, the fact that he's trading this big premium to Bitcoin would be really damaging. So let's say Bitcoin goes to 70,000; that's not a big deal. If you own Bitcoin, you can wait it out 5, 10 years if you had to. Lord knows people have done that before. Nobody's been—actually, nobody's been used to a cycle of Bitcoin that's really negative for many, many, many years. Most people have waited it out as a few years, but it's an asset; its price is unpredictable; it's a random walk. You know, if you own it, you hope it goes up; you're bullish; fine. But, you know, there is no guaranteed crystal ball, especially now that it's a $2 trillion asset or what have you. You know, it's certainly—you know, I guess there's 21 million Bitcoin, right? So yeah, it's hard for things to go that asymptotic.
And I almost feel like at this point, like a strategic Bitcoin reserve and/or the other possible bull cases for Bitcoin are somewhat baked in; like, they're very known. So what surprises do we have left? If you're bullish on Bitcoin, I was long a lot in the 70,000 range when I was personally pitching the strategic Bitcoin reserve to the Trump administration, and it felt like, you know, that could be a big catalyst. But, you know, it didn't really—it's now consensus, and if that's not a catalyst, I don't know what it is. You know, I kind of look at the world that way: like, if the supply-demand imbalance is that tight that, like, news of a Bitcoin strategic reserve purchased by world governments and corporations is like, "Okay, I'm just going to rally 20%," it's like, "What the—?" That's it? It just sort of means that everyone's on the sell side of the transaction, like, "Okay, I'm out." So I think there's a little bit of that happening. I want to see Bitcoin be the world one global currency, but the funny thing about that is it doesn't mean the price of Bitcoin has to go up. In fact, we could completely replace our monetary system, and Bitcoin doesn't have to change, penny [Music].
There's just not that much liquid cash out there, and when you price things in Bitcoin instead of dollars, you know, the amount is arbitrary; you're really pricing dollars. So I don't know; I'm a little confused by some of it, and some of it is just like indulging a bit of a fantasy just to indulge it. But I'm a bit skeptical. But again, the nice thing is it's an arbitrage, right? You can short—you could just short MicroStrategy and long Bitcoin. What's the worst that can happen? I mean, how can he outpace by borrowing money? How can he outpace your purchase of Bitcoin, especially if you do a two-to-one ratio? So you basically get a free put on Bitcoin. If Bitcoin drops, he gets hit way harder than your long.
So yeah, I mean, I think Bitcoin can keep going up, but I don't—I still think you get your arbitrage. I'm short Cassava, short MicroStrategy, short DJT. I'm starving for some longs. There are some good pharma longs; there's this little never-do-well company that makes their own GLP called Viking; they're okay. But we can look at some other stocks.