Kerrisdale Capital, a hedge fund, today revealed a nuanced investment thesis: take long positions in bitcoin while simultaneously taking a short position in MicroStrategy stock. This move is based on the assessment that MicroStrategy, which has positioned itself as a de facto investment vehicle in bitcoin, is trading at a significantly unjustified premium to the underlying cryptocurrency that primarily constitutes its value.
Long bitcoin, Short MSTR
The hedge fund's analysis articulates: “MicroStrategy shares have soared amid a recent surge in the price of bitcoin but, as is often the case with cryptocurrencies, things have gotten carried away.” Kerrisdale highlights a critical discrepancy, noting that MicroStrategy's share price implies a btc value of “over $177K, or two and a half times the spot price of bitcoin.”
Delving into the reasoning behind the premium on MicroStrategy shares, Kerrisdale debunks several arguments that have been made in favor of the company's market valuation. The report categorically states: “None of the reasons commonly given for MicroStrategy's relative attractiveness justify paying more than twice as much for the same currency.” This statement underlines the hedge fund's stance on MicroStrategy being overvalued relative to direct btc exposure.
MicroStrategy, under the leadership of CEO Michael Saylor since 1989, has aggressively pursued btc accumulation, making it a central pillar of its investment strategy. From August 2020 to 2023, the company made significant financial moves to increase its holdings, which now exceed 214,000 btc.
Kerrisdale's valuation approach considers MicroStrategy's enterprise software business and its btc reserves. The analysis concludes that the software business, while still operational, “no longer contributes significant value to the overall company,” highlighting bitcoin's overwhelming influence on the company's valuation.
A key aspect of Kerrisdale's criticism centers on the inflated premium to net asset value (NAV) attributed to MicroStrategy shares. “At 2.6x, MicroStrategy's stock premium is exceptionally high,” the report states, suggesting an unsustainable market position relative to historical data. Kerrisdale argues that a correction toward a more historically consistent premium would imply a substantial downside for MicroStrategy stock relative to bitcoin's performance.
The report takes an in-depth look at the potential implications of MicroStrategy's financial strategy, including its reliance on leverage and the dilutive effects of its financing mechanisms. Kerrisdale's analysis suggests that while MicroStrategy's aggressive capital market activities have managed to increase its bitcoin holdings, they have simultaneously led to a stagnation in the amount of bitcoin per share, due to the dilutive impact of debt financing and stock offerings.
In conclusion, Kerrisdale Capital estimates that “assuming the current contracts premium of 2.6x to 1.3x, more historically consistent, represents a 50% downside in MSTR relative to bitcoin.” This conclusion is drawn from an examination of the interaction between MicroStrategy's stock premium, its bitcoin holdings, and broader market dynamics.
The community reactions were quite critical. Bit Paine (@BitPaine) commented: “Are they selling advance tickets to his funeral?” Another crypto analyst, Trey Sellers (@ts_hodl), said: “It seems like a logical position to me, although markets can stay irrational longer than you can stay solvent, as they say.”
OSF (@osf_rekt) added: “There's probably nothing sillier than publishing your mid-curve business idea to an army of irrational degens who will make it their life's mission to take you out.”
At the time of publication, btc was trading at $71,519.
Featured image from PaySpace Magazine, chart from TradingView.com