MicroStrategy Stock: A Potential 50% Drop (Rating Downgrade)

Summary MicroStrategy is downgraded to a near-term sell and intermediate-term hold due to its overvaluation and extreme investor sentiment tied to Bitcoin. MSTR stock's valuation is irrational, with its market cap decoupled from reality, driven by high Bitcoin prices and speculative trading. MicroStrategy stock is highly volatile, with significant risks due to its heavy reliance on Bitcoin and continuous share dilution to purchase more BTC. A fair valuation for MSTR could be around $175-225, reflecting a 25-50% premium to its Bitcoin holdings, suggesting a potential 50% drop from current levels. MicroStrategy Overview Things were much different when I wrote about MicroStrategy Incorporated "MSTR" ( MSTR ) early this year. MicroStrategy's stock was coming off a significant correction, trading below $50 (adjusted for the recent spit), below a $10 billion valuation, and below the fair value of its massive Bitcoin stockpile. With Bitcoin USD ( BTC-USD ) highly likely to move above $50K and higher, buying MicroStrategy stock was a no-brainer, and the stock did extraordinarily well. In fact, MicroStrategy recently surged to over $500, appreciating by over 10x since I published my bullish article on the company. MSTR Stock 1-Year Chart MSTR (StockCharts.com) MicroStrategy had a significant blow-off top, fluctuating between $375 and $550 in a single trading session. This is about a $35 billion move market cap-wise, which is more valuable than all the Bitcoins the company owns here. Also, with over 100 million shares changing hands in one day, it equates to about $50 billion, which is enormous. All the technical indicators are highly stretched, essentially screaming sell here. Today's MicroStrategy stock is much different than what I wrote about at the beginning of this year. I recently sold my position in two tranches, and I've been highlighting MSTR as a "take profit" candidate in my Investment Group as the share price skyrocketed into the $450-550 range. For reference, MicroStrategy is a company that saw the value in Bitcoin early and began investing in Bitcoin instead of holding devaluating cash on its books. This revolutionary strategy enabled MicroStrategy to become one of the most significant holders of Bitcoin over the years, simultaneously transforming MSTR into the most exciting Bitcoin proxy play. MicroStrategy - Better Than Bitcoin ETFs MicroStrategy is better than a Bitcoin ETF because it's not an ETF, and many people trade MSTR instead of dealing with ETFs and crypto exchanges. Many more people have access to MSTR than Bitcoin ETFs or actual Bitcoin. There are also insane options action in MSTR shares, making it almost an ideal trading vehicle for Bitcoin-related exposure. While certain aspects of this stock are excellent, there are considerable issues. For instance, MicroStrategy can become enormously overbought and outrageously overvalued, posing a significant risk to investors and anyone not familiar with the dynamics of this company. When The Top Is In I recently read a fascinating article discussing how MicroStrategy could become a multi-trillion dollar company and how it's Bitcoin's "only" investment bank. The article discusses and attempts to explain the massive divergence between its market cap and the value of its Bitcoins. My issue with this perspective is that you can't explain away MSTR's irrational price action. There is no fundamental reason MSTR should be near the $400-500 level. MSTR is this high primarily because of the incredibly high investor sentiment regarding Bitcoin and MicroStrategy's future strategy of purchasing more Bitcoins. Devoid of any connection to reality, MSTR has essentially become a "meme stock." Bitcoin Doesn't Only Go Up The problem with this dynamic is that Bitcoin doesn't go up perpetually. Bitcoin is in a bull market now, but someday, it will end, and we will likely see a substantial bear market again. Significant pullbacks are also common, and Bitcoin could have a 20-30% correction at any time, which would be considered a relatively normal pullback process, especially after the extraordinary gains. While Bitcoin could pull back by 20-30% on "any given Sunday," MicroStrategy could drop by much more. Given all the optimism surrounding MSTR, this may not be a popular valuation process. However, I still believe we should value this company "traditionally" and not according to eccentric estimations that may come true in the distant future. MicroStrategy's "Fair Value" MicroStrategy was originally a niche software company with a relatively steady business but, unfortunately, little or no growth. MSTR should have about $500M in sales next year and in 2026. If we're generous, we can give its software business a 6x sales valuation. Thus, MSTR's software operations may be worth about $3 billion. However, this valuation is minuscule relative to MSTR's burgeoning market cap, and most of the company's value comes from its Bitcoin Holdings. MicroStrategy now holds 331,200 Bitcoins . At its current market value of approximately $98,300, MSTR's Bitcoin treasure chest is worth roughly $32.56 billion. Once we add the $3B estimate for its software segment valuation, MSTR's valuation is about $35.56B. However, there are two ways MSTR gets more Bitcoins on its books , either by taking out debt or by issuing more shares. MSTR has about $4.2B of long-term debt, which it used to purchase Bitcoins on its balance sheet. Considering this debt load, MSTR's value may be around $31.36B. MSTR's Bitcoin Stash True Worth $31.36B may be MSTR's fair value here. However, Bitcoin could continue rising, and MSTR is a company. Perhaps it should trade at a premium to its BTC. However, what is the correct or acceptable premium? BTC could be worth $125-150K in about a year. This dynamic implies that MSTR may trade around a 25-50% premium to its Bitcoin holdings. This dynamic suggests that MSTR's market cap could be about $40-50 billion, with BTC around $100K, and still considered sane. However, at $400, MSTR's market cap is around $90 billion. When the stock hit a nose-bleeding level of around $550, its market cap was approximately $125 billion, which is insane, valuing each of the company's Bitcoins at roughly $374,000. MSTR's Valuation has Decoupled from Reality Bitcoin may not reach this lofty level for several years, potentially taking five years or longer. Some risks could cause BTC to drop drastically, and there is no guarantee that BTC will continue to increase perpetually. It's irrational for MSTR to be at such frothy levels, and what will happen to MSTR if Bitcoin shrinks in value, even if it is just another transitory decline? At $550, each of MSTR's BTCs is valued at around $374,000. At $400, each BTC is valued at around $272,000. This is where we are now, and it's still a very lofty valuation. There isn't a reason (in my view) why MSTR's Bitcoins should be valued at a 178% premium. Given the dynamic, a "fair valuation" with about a 25-50% premium may be around $175-225 for MSTR's stock price. This dynamic implies that MSTR could decline by about 50% from its current price of about $400 to reflect its valuation more accurately. It's Not Always Bullish Also, we're only discussing the Bullish case for Bitcoin. We should all consider the massive rally Bitcoin has had, tripling since about the start of the year. Therefore, we may see a substantial pullback soon. Bitcoin can have violent 20-30% corrections, which is considered normal in the crypto segment. When Bitcoin goes through another grueling pullback of 20-30% or greater, MSTR's stock could decline much more because its BTC premium could revert to the mean, possibly even inverting, as it did when I wrote my bullish article on MSTR early this year. If BTC dropped from roughly $100,000 to about $70,000, MSTR's Bitcoin stash would be worth around $23 billion. MSTR's premium could also revert to the mean as prices drop. If MSTR retains about a 20% premium, its BTC stash could be valued at around $27.6B. This dynamic implies a potential market cap of about $25B once we adjust for the company's software business and debt. This scenario suggests that MSTR's stock may decline to about $111 or roughly 80% from its recent peak if BTC declines by about 30% from the $100K level. MicroStrategy Keeps Selling Shares To Buy Bitcoin MSTR continuously prints more shares to buy more Bitcoins. While this approach makes sense in some instances, it could end badly, and there is perpetual dilution of MSTR's stock. Increasing Stock Dilution Share count increasing (ycharts.com) MSTR's share count increased drastically by about 44% over the last year. While issuing new shares and buying Bitcoins has paid off, it only works well when Bitcoin rises in value. This strategy could appear questionable when BTC corrects or goes through another bear market. In a crypto downturn, the increased debt and sharply higher share count will likely work against the company, potentially leading to significant declines and massive volatility in its share price. The Bottom Line: MSTR is Like A Bitcoin ETF MSTR is an exciting investment, but deep down, it remains a proxy for Bitcoin and is very much like a Bitcoin ETF. Bitcoin ETFs do the same thing. They buy Bitcoins, offering investors exposure to the BTC space. There isn't a valid reason why MicroStrategy's Bitcoins should be worth 178% more than Grayscale's or anyone else's. Grayscale Bitcoin Trust ETF ETF ( GBTC ) owns 218,408.356 Bitcoins and maintains a tight ratio of about 1-1 premium-wise. While I like MSTR and its forward-looking approach, its stock is massively overbought here, setting an example of frothiness in the general crypto space. While I am not calling for a top in the market or the Bitcoin/crypto rally, MSTR is a wake-up call regarding what happens in a market when things heat up too much and too quickly. MSTR is an increased-risk stock and may continue exhibiting abnormally volatile behavior until the market can reach a more evident consensus regarding its valuation, which should be substantially lower than where it is now ($90 billion).