As we end 2023, the original alt-coin, Bitcoin (BTC-USD), is flying once again. That has taken stocks tied to Bitcoin's fortune - miners and those that hold significant amounts of Bitcoin - higher with it. One such stock that is perhaps the most tied to Bitcoin is software company MicroStrategy (NASDAQ:MSTR), which owns something like nearly $6 billion worth of Bitcoin. That means the stock's fortunes are very much tied to the price action of Bitcoin, and MicroStrategy is soaring as a result.
The last time I covered MicroStrategy was in the fall of 2022, where I reiterated my prior buy rating. The stock has nearly tripled since then, so is the bull run over? In a word, no. Let's dig in.
Short-term caution, long-term look out above
As I mentioned, MicroStrategy owns so much Bitcoin that its stock is simply a leveraged play on the price of Bitcoin. That hurts when Bitcoin is trading weakly, but when it makes big up moves, we tend to see MicroStrategy produce extremely large returns. That's what has happened in recent months, as seen below, but I do think we need a bit of a pullback before continuing higher.
There's a massive negative divergence in play right now, wherein the PPO makes lower relative highs while price makes higher relative highs. The divergence simply means momentum is not confirming price action, which often portends a pullback. This is not a guarantee, but does greatly increase the odds of a consolidation at least, and likely a slight pullback.
Often when we see the PPO produce a negative divergence like this, we'll get a 50-day simple moving average test. Were that to occur, I would see MicroStrategy pulling back into the rising 50-day SMA, corresponding to the gap support from early December. Those levels are rapidly converging in the area of ~$540, so I'd expect any selling to stop there, or higher. That's a relatively long way down from here, to be sure, but keep in mind the 50-day SMA is rising very quickly, so it's possible the actual pullback is smaller, but takes a bit more time to resolve. Either way, maximum downside right now, in my view, is that 50-day SMA.
Now, I mentioned MicroStrategy is just a leveraged way to gain Bitcoin exposure, and I said that because the correlation between the stock and the coin is extremely high.
This is the rolling 50-day correlation to Bitcoin, and we can see it's 0.95, meaning they are moving almost perfectly together. The correlation varies at times but the point is that this is irrefutable proof that owning MicroStrategy is nothing more than a way to gain access to Bitcoin's price action. You'd expect that given the company owns almost $6 billion worth of the coin, but it's good to verify assumptions.
Given this correlation, we must know what Bitcoin is doing in order to understand what MicroStrategy may do in terms of future price action.
Bitcoin put in a negative divergence, just like MicroStrategy did, but the important thing to note is that Bitcoin's negative divergence is much closer to completion than MicroStrategy's. We can see Bitcoin has been consolidating since early December, that it's much closer to its rising 50-day SMA, and that the PPO is much closer to the centerline. Bitcoin has key price support at about $38k from the November top, should the 50-day SMA fail on this pullback. But either way, I'd expect to see Bitcoin moving higher once again. I think Bitcoin has legs to its former highs in the $65k+ area in 2024, but first things first, we need to see this pullback result in a successful test and continued move higher.
Other considerations
MicroStrategy made it clear a long time ago it intends to buy as much Bitcoin as it possibly can and hold it while the price goes up. That means financing its purchases is the most important thing from a fundamental perspective, so let's take a quick look at its capital structure.
The company has ~$2.2 billion in long-term debt, but it only costs about $11 million per quarter in interest expense at the moment. That debt level has been quite steady, as has the associated interest expense, so as long as MicroStrategy doesn't drastically increase the amount of debt it has, I see no issue here.
Of course, the other way a company can raise capital quickly is by issuing common shares, and MicroStrategy has done quite a lot of that.
Shares are up to nearly 15 million (with more coming), and that's not great. Dilution means that if you own shares, your ownership stake is reduced on a relative basis even if you haven't sold anything. I don't like cases of dilution, generally, for this very reason. However, MicroStrategy is different. This company basically exists to buy and hold as many Bitcoin as possible, so in certain cases, issuing shares is the most efficient way to raise capital to do that.
How could that be? Issuing shares is "free" in the sense that there's no explicit cost, such as interest expense. There's an implied cost, which is shareholder dilution, but MicroStrategy doesn't have to pay anything to issue shares.
In addition, if a company can issue shares that are valued favorably, why wouldn't it do that?
Shares are at almost 11X tangible book value right now, meaning MicroStrategy can issue shares when the valuation is high to get the best deal for shareholders. You can agree or disagree but in this special case; I actually think shareholder dilution is exactly the right thing to do.
Speaking of the valuation, what I care about is the stock's valuation relative to the coin itself, which is much more relevant than price-to-sales or price-to-earnings.
We can see that MicroStrategy, relative to the price of Bitcoin itself, is actually the highest it's been since 2021. The valuation is also up about 31% since Bitcoin made its initial break higher a couple of months ago, meaning that MicroStrategy's share price gains have been from both the price of Bitcoin moving higher, but also valuation expansion.
On this basis, the stock can be seen as expensive, which ties into my view of the technical picture begging for a pullback. With all of this in mind, I'm reiterating my buy rating on MicroStrategy, as I think Bitcoin is going a lot higher in 2024 and will take MicroStrategy with it. I also think the stock needs a pullback to reset momentum and sentiment, so short-term, I think you can be patient. But if you want exposure to Bitcoin pricing in 2024, there are few better ways I can think to do that.
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