According to information from MSTR-Tracker, the net asset value of MicroStrategy (MSTR) compared to the amount of BTC the company holds has reached the highest level in the past three years, reaching around 270% as of October 14.
Net asset value of MicroStrategy compared to the amount of BTC it holds. Source: MSTR-Tracker.com
The net asset value is measured by dividing the market price of MSTR by the value of BTC it owns. A high net asset value indicates that holding MSTR shares has yielded a 2.7 times return compared to holding BTC directly.
The key factors explaining why MicroStrategy's stock trades at a higher price than the value of BTC it holds include leveraging and free cash flow from the company's software business.
MSTR leverage creates a gap compared to the amount of BTC held
MicroStrategy leverages by using financial instruments such as at-the-market (ATM) equity offerings and convertible bonds to increase its BTC holdings.
As of October 14, the company had about $3.91 billion in long-term debt, with a market capitalization of $35 billion. This means the company's assets are 1.1 times larger than its equity capital due to the use of debt.
In summary, for every $1 of equity Capital, MSTR controls $1.1 of assets (mostly BTC), thanks to the use of borrowed Capital.
Assuming BTC price increases by 10%. Without leverage, MicroStrategy's BTC holdings would increase by 10%, and the stock price would also increase by 10%. But due to the company's use of leverage, it controls a larger amount of BTC compared to its own Capital.
Source: X
Therefore, when BTC increases by 10%, the total asset value of the company increases by more—around 11% instead of 10%, showing the gap in MSTR's net asset value comes from the use of leverage.
MicroStrategy's software business
Although often overlooked, MicroStrategy's software segment generated around $111 million in revenue in the second quarter, with steady growth from subscription revenue. This provides a cash flow foundation to service debt and maintain the BTC acquisition strategy.
Key profitability metrics for MicroStrategy's second quarter. Source: Bloomberg
Although the software segment is not the focus, it contributes to MSTR's overall ability to execute its BTC strategy without needing to sell BTC to service debt, thereby maintaining BTC holdings and the net asset value gap.
MSTR investors embrace the 'macro BTC' strategy
Finally, the market's strong belief in CEO Michael Saylor's aggressive BTC acquisition strategy is very high. Since adopting BTC as its primary asset in August 2020, MSTR has consistently outperformed BTC and most traditional stocks.
For example, MSTR has increased by 1,700% since its first BTC purchase. In comparison, BTC's gains during the same period are around 500%, leading analyst Maartunn to call it "Bitcoin on steroids".
Performance of MSTR compared to BTC since MicroStrategy's first purchase in August 2020. Source: X
Leading US stock indices such as the S&P 500 and Nasdaq Composite have generated returns of around 80% and 70%, respectively.
Investors are willing to pay a higher price for MSTR because they expect the company to continue increasing its BTC holdings over time, especially if BTC enters a new phase of price appreciation.
