Kerrisdale Capital has argued in a recent report that MicroStrategy’s shares have become overvalued. “We are long Bitcoin and short shares of MicroStrategy, a proxy for Bitcoin which trades at an unjustifiable premium to the digital asset that drives its value,” the company stated.
MicroStrategy’s shares witnessed a notable 14% decline on Thursday following the disclosure.
Unjustifiable Premium
The firm argued that the premium at which MicroStrategy’s shares are trading, representing over two and a half times the spot price of Bitcoin, is unwarranted, claiming that BTC would need to be trading at $177,000 to justify it.
However, Kerrisdale Capital believes that the inflated premium on MicroStrategy’s shares will likely decrease, offering an opportunity for a pair trade.
The firm clarified that its analysis isn’t based on a bearish outlook towards Bitcoin or MicroStrategy individually but rather on the distorted relationship between them.
MicroStrategy’s software analytics division contributes just 3% to the company’s overall value, with much of its Bitcoin acquisitions financed through debt and equity offerings, diluting shareholder value. Despite an increase in Bitcoin holdings, Kerrisdale asserts that the amount of BTC per share has remained largely unchanged in recent years.
While some argue for MicroStrategy’s premium due to its ability to reinvest software business cash flows, lack of management fees, liquidity, and ease of trading, Kerrisdale finds these arguments unconvincing.
MicroStrategy trades at a 2.6x equity premium to Bitcoin, surpassing the historical average of 1.3x. Kerrisdale notes that this premium has exceeded 2x on only 6% of trading days since 2021, suggesting an overvaluation.
Unique Leverage and Bitcoin Development Focus
Once seen as a primary route for Bitcoin investment, the expanding accessibility of cryptocurrencies via brokerages and low-fee investment options has reduced its appeal.
Saylor has previously expressed confidence that MicroStrategy will remain appealing to investors, highlighting its unique offering for those bullish on Bitcoin. He emphasized that unlike ETFs, which charge fees without providing leverage, MicroStrategy offers leverage without fees.
He also recently announced MicroStrategy’s rebranding as a “Bitcoin development company,” citing the success of its BTC strategy and its status as the largest public holder of the asset. MicroStrategy currently holds 214,246 BTC, a 54% increase from the previous year.
Saylor spoke about the company’s flexibility as an operating entity to manage capital and operations, aiming to accumulate more BTC for shareholders and promote the growth of the Bitcoin network through software development and leveraging capital markets.
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