The Worst Stock in the World

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Earlier this morning, I was live in The Oxford Clubroom discussing what I believe is the worst stock in the world.

The stock is MicroStrategy (Nasdaq: MSTR).

I first criticized MicroStrategy in early 2021. I was quoted in The New York Times, Bloomberg, Fox Business and other financial media about what I thought was “the most irresponsible action [I’d] ever seen from an executive team or board.”

My issue with MicroStrategy was that despite operating a software business, it had shifted its focus to buying and holding Bitcoin.

The company was borrowing money to acquire more and more Bitcoin, and CEO Michael Saylor said he planned on never selling any of the beloved cryptocurrency.

Regardless of what you think of Bitcoin, that’s not a business model. And I was outraged that the board of directors rubber-stamped this foolishness.

The stock was trading in the $600s when I first started slamming it. A year later, its price had been cut in half. And by the end of 2022, the stock was trading in the $130s.

But when Bitcoin hit a new all-time high last week, MicroStrategy soared to a 25-year high of over $1,800.

And a bet on it going back down is one of the biggest slam dunks I’ve seen in the market.

The stock price is closely tied to the price of Bitcoin. If Bitcoin drops, MicroStrategy will tank. Bitcoin is volatile, so at some point, it will head lower. And it feels like that will be sooner rather than later, as the cryptocurrency has nearly doubled in less than two months and has tripled since October.

Plus, last week, rapper Drake posted a video of Saylor talking about Bitcoin on his Instagram account, which has 146 million followers. It reminds me of the Matt Damon commercial that aired right around Bitcoin’s previous peak. Those kinds of things – public endorsements from some of the most famous celebrities on the planet – don’t happen at bottoms. They happen near tops.

But more importantly, even if Bitcoin doesn’t drop, there is still no reason to own MicroStrategy’s stock.

[Editor’s Note: Since Marc finished writing this column on Friday, Bitcoin has dropped by nearly 3% and MicroStrategy has fallen by a whopping 16%.]

The company owns 205,000 Bitcoin, which has a total value of about $13.7 billion. The market cap of the stock is $28.1 billion. In other words, shareholders are paying nearly two times the value of the Bitcoin the company owns.

If you want exposure to Bitcoin, a better option is to simply buy a Bitcoin exchange-traded fund (ETF), like the iShares Bitcoin Trust (Nasdaq: IBIT) or several others. These closely track the price of Bitcoin but don’t have an outrageous 2X valuation. In fact, the ETFs are pretty much priced at their net asset values.

There is no valid reason to own MicroStrategy’s stock unless you think Saylor, the CEO, is a brilliant trader and you’re comfortable with him continually borrowing money in order to buy more Bitcoin.

In early March, the company raised $800 million by offering convertible bonds. The purpose of the new debt? To buy more Bitcoin. Then, last week, it announced it was selling another $500 million of notes for the purpose of… you guessed it, buying more Bitcoin. So that’s $1.3 billion in debt in just one month.

The true value of this stock – based on the 205,000 Bitcoin that it owns – is $816, which is just over half of what it’s trading at now. And that’s with Bitcoin at all-time highs of just below $70,000.

“Wait!” you say. “What about MicroStrategy’s software business?”

Revenue was 14% lower in 2023 than it was 10 years ago, and free cash flow was less than $10 million.

Let’s be generous and assign the company’s software segment a price-to-cash flow (P/CF) ratio of 20. (Normally, I would give a struggling business with declining cash flow a multiple of 10 or less, but like I said, I feel generous today.)

So what could happen to MicroStrategy’s stock if Bitcoin slips? Based on the company’s holdings of 205,000 Bitcoin and the P/CF ratio of 20 for its software business, here’s what the stock should be worth:

Chart: When Bitcoin's price is... MicroStrategy's stock is worth...

You may be thinking, “I don’t own MicroStrategy, so I don’t really need to be concerned.”

Well, lots of mutual funds own it.

The Fidelity Canadian Growth Company Fund has a 1.3% allocation to MicroStrategy, which has an office in Ottawa. And the Fidelity Small Cap Growth Fund (FCPGX) has nearly 1% of its assets in the stock.

The iShares Russell 2000 ETF (Nasdaq: IWM) also has 0.5% of its portfolio in MicroStrategy. Since it’s an index fund, it must stick to the allocation of the Russell 2000 index, which includes the stock.

MicroStrategy is in several other well-known indexes too, including the Nasdaq Composite, the Russell 3000 and the S&P SmallCap 600. So any index fund or ETF that is based on those indexes will have some exposure to MicroStrategy.

The stock dropped by more than 80% last time. This time could be even worse.

We’ve seen this movie before. We know how it ends.

Not well.

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