MicroStrategy Stock is Not a Good Bitcoin Investment
Bulls make money, bears make money, but pigs get slaughtered. That old Wall Street adage warns against letting greed get in the way of making sound investment decisions. Most retail investors are only familiar with the bull side of making money, and rightly so. Shorting is often akin to speculating because the longer-term trend of the stock market is always growth. Even if you have a sure short, people’s greed far exceeds your margin limits.
Shorting companies is the domain of sophisticated institutional investors who have the capital and platforms required to make money off of other people’s stupidity. One such firm is Citron Research.
About Citron Research
If you’re long a stock and Citron writes a hit piece on it, you’re wise to start questioning your thesis. While the firm has generated its share of controversy, they have made enough successful calls that whatever they say merits a closer look. The criticism largely surrounds the fact that Citron takes a short position in a company and then – while openly disclosing their financial interest – shares with a large audience the details of why they’re short. Usually, this comes in the form of a well-researched investigative report that proves their thesis. The extent to which shares fall afterwards doesn’t prove the thesis was correct. Typically, proof of failure is regulatory scrutiny or even bankruptcy.
Where there’s smoke, there’s fire. We’ve seen enough over-the-counter scams to know that when you see red flags you back away. Says Citron’s website, “since 2001, more than 50 companies covered by Citron Research have become targets of regulatory interventions.” Citron also dabbles in long positions as well, and isn’t ashamed to admit they’re wrong with pieces like “CITRON REVERSES OPINION ON TESLA. THE STORY HAS BECOME TOO COMPELLING TO IGNORE.”
Today, Citron wrote about how they believe a publicly-traded company called MicroStrategy (MSTR) is “the best way to own bitcoin in the stock market,” and we’re curious why that is. The only time we’ve come across MicroStrategy before was in our recent piece on The Safest and Easiest Way to Invest in Bitcoin in which we concluded:
When a CEO decides to park upwards of $400 million of the company’s cash in bitcoin, he’s speculating on an alternative asset class instead of running the company. Stay far away.Credit: Nanalyze
Citron isn’t the only firm saying favorable things about MicroStrategy, so today, we’re going to look into why that is.
The Safest Way to Invest in Bitcoin
Citron starts out by pointing readers towards a handful of hour-long videos on YouTube where MicroStrategy CEO Michael Saylor talks about how he didn’t understand bitcoin until he did. The conversation goes into asset class allocations and volatility, and Mr. Saylor sounds just like any other bitcoin bull expounding on their winning thesis. His biggest anxiety as he lays in bed at night is that he might not be able to buy more bitcoin before it goes to the moon, yada yada yada.
Citron goes on to talk about their belief that bitcoin is the best hedge against inflation in the market right now. Let’s assume a bullish thesis for bitcoin has been proven. Citron then says:
For anyone who has tried to buy Bitcoin, it is a real pain in the ass with the constant fear that it can get stolen.
The safest way to invest in Bitcoin is to buy the stuff directly from a firm like Coinbase. They don’t give you enough rope to hang yourself. Sure, they have high fees, and there’s the usual systemic risk you face with entrusting your money with any financial institution. But all things considered, we’re sleeping fairly well at night knowing Coinbase isn’t going to let our bitcoin get stolen.
Citron goes on to say:
So, the question is how can I own Bitcoin AND most importantly have a level of safety with an underlying business.
That’s not how we go about investing as tech investors. We always prefer pure-play exposure to a technology, not some mix of other business segments that dilute that exposure. By purchasing shares of MicroStrategy, we’re buying $700 million in bitcoin (at today’s price of around $18,500 per coin) plus a stale enterprise software business.
About MicroStrategy Stock
You’d be excused for not knowing that MicroStrategy is actually in the business of building enterprise software. With a market cap of $2.3 billion, they’re found on a recent Gartner Magic Quadrant for analytics and business intelligence platforms alongside computing giants such as Oracle and IBM.
MicroStrategy has an interesting past. Their IPO in 1998 was soon followed by the dot-com bubble bursting in 2000. That same year, they had a tussle with the SEC, and one of the IoT stocks we like, Alarm.com, was born within their walls as an R&D project. (In 2009, MicroStrategy sold their majority interest in Alarm.com for $27.7 million.)
The question is whether or not MicroStrategy is an enterprise software company we want to own. Says Citron:
At these prices today, investors are getting a best in class software business at a discount and a free call option on owning a growing treasure chest of bitcoins!!!
Valuing any business is exceptionally difficult. If we were to invest in a disruptive enterprise software business, we would expect it to be experiencing double-digit revenue growth. Here’s what MicroStrategy’s revenue trajectory looks like over the past four years.
Instead of preaching the merits of bitcoin on financial podcasts, the CEO of MicroStrategy ought to be telling investors his plan to grow the company’s revenues. When you buy shares of MicroStrategy, you’re buying a declining software business, a bitcoin holding that will only be as successful as the CEO’s ability to time the market, and now, a bunch of hype around how MicroStrategy stock is “the best way to own bitcoin in the stock market.”
Bitcoin as a Hedge
Some might argue that MicroStrategy is just hedging against predictions like the one from Citigroup that the U.S. dollar will fall -20% by next year. Earlier this year, ARK Invest coined a piece on how “bitcoin is beginning to infiltrate corporate balance sheets,” noting that “MicroStrategy’s shift toward inflation hedges like gold and bitcoin could be the start of a larger trend, encouraging other companies to diversify their cash balances into bitcoin.” Let’s hope not.
It is the responsibility of the management team to speculate on the behavior of the macroeconomy and hedge away risk when appropriate. Companies have been doing this for decades. For example, multinational firms will often use futures contracts to hedge away foreign currency risk. This is normal. The question is, when are companies engaging in speculation as opposed to exercising a prudent hedging strategy?
Pundits will probably say “Mr. Saylor made the right move because his holdings in bitcoin have increased XX% so far.” Sure, the holdings have increased, but that only benefits shareholders when Mr. Saylor decides to convert paper gains into real gains. Then, what he plans to spend that money on also affects the extent to which shareholders will benefit from bitcoin’s price appreciation. If Mr. Saylor’s forte is successfully being able to time the cryptocurrency and commodity markets, he ought to split that venture off from the enterprise software business to maximize the value of both.
Most people looking to invest in bitcoin are interested in that thesis alone. Few people out there are looking to invest in “bitcoin and an enterprise software company with declining revenues.”
We’re long bitcoin with a relatively small position on Coinbase based on ARK Invest’s commentary around bitcoin becoming a safe haven like gold. A company’s management team shouldn’t be distracted from their core competencies while speculating on the long-term movements of commodities and cryptocurrencies. We’d advise readers who want to invest in bitcoin to do just that – invest in bitcoin. Like shorting, MicroStrategy stock should stay in the domain of more sophisticated institutional investors like Citron.
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