Examining MicroStrategy’s record-shattering $21bn ATM

History, they say, doesn’t repeat, but it often rhymes. Bitcoin-hodling MicroStrategy is an excellent example.

In early 2000, MicroStrategy embodied the excesses of the dotcom bubble: Super Bowl advertisements, a sky-high stock price of $333, a $25bn market cap, and boundless optimism. Then came accounting restatements, fines, lawsuits, and a humbling order from the SEC to “cease and desist” from securities law breaches. By autumn 2001, with its stock scraping $0.42, the company seemed destined to join the lengthy roster of tech-bubble casualties.

But corporate obituaries, like Abe Vigoda’s, can be premature. The business intelligence software company clawed its way back in the ensuing decade-and-a-half, stabilising at around a $1-2bn market cap. Then, in 2020, co-founder Michael Saylor — the same executive who presided over the 2000 debacle — transformed MicroStrategy into something new: a bitcoin-based investment vehicle.

Undeterred by sceptics, Saylor has passionately touted bitcoin as “the most valuable asset in the world.” And that’s one of his more measured pronouncements.

The critics had a field day when bitcoin crashed in 2022. But who’s laughing now?

Bitcoin’s resurgence has sent MicroStrategy’s market cap soaring to nearly $70bn, with the company’s share price up over sixfold in the past year and 20 times (!) in the last five years. This year alone it has rallied 438 per cent. Saylor — fresh from settling a $40mn tax fraud lawsuit last June with Washington, DC — has emerged as corporate America’s ultimate Comeback Kid, the Joe Montana of the Nasdaq.

MicroStrategy has raised capital aggressively to finance its bitcoin purchases, selling $4.6bn of equity in recent years and raising $3.2bn from convertible bonds in 2024 alone. Now it’s doubling down with an audacious $42bn fundraising plan, evenly split between an at-the-market (ATM) equity offering program and new debt securities. At current prices, that means buying nearly 600,000 Bitcoin — close to 3 per cent of the total supply.

This raises the question: Is this another act of hubris, a callback to the Super Bowl splurge of 2000, or another step in MicroStrategy’s unstoppable rise? Depending on your point of view, the company’s rationale for the $42bn target is either mystical or meshuggeneh.

As per Bloomberg:

The reason for that number is in part related to the science fiction series The Hitchhiker’s Guide to the Galaxy where a supercomputer calculates the answer to the question of life, the universe and everything as the number 42, according to MicroStrategy Chief Executive Officer Phong Le.

“We believe it’s a unique number with some special characteristics. It’s the sum of 21 plus 21,” Le said on an earnings call Wednesday. “We all know that 21 is a magic — a magical number in the world of Bitcoin. There can only ever be a maximum of 21 million Bitcoin in circulation.”

The mechanics of the equity-raise merit a closer look. ATM offerings allow companies to dribble out new shares gradually into the market rather than through traditional placements. It’s an elegant solution for volatile stocks like MicroStrategy’s, enabling companies to capitalise opportunistically on price spikes while avoiding the steep discounts typically required for large placements.

It’s also an “everyone-welcome” model — all investors have an equal chance to buy shares, with no favouritism for institutions — and the minimal intermediation arguably aligns with the decentralisation ethos of crypto. Moreover, management doesn’t have to waste time on roadshow trips or rubber-chicken lunches with fund managers.

The ATM’s flexibility has made it popular with capital-consumptive sectors — such as real estate investment trusts, life sciences and energy — as a way to meet ongoing funding needs. MicroStrategy’s embrace of the ATM speaks to the tool’s versatility.

The crucial factor is for the shares to have enough on-exchange liquidity to allow an issuer to sell in size. Roughly speaking, you don’t want your selling program to account for more than, say, 10-20 per cent of the volume in any trading session. MicroStrategy benefits from huge trading flow, making it feasible to offload a lot of stock via ATM without putting undue pressure on the stock. Also, blocks of shares are sometimes sold when a fund manager makes a bid, but these are at the full discretion of management.

ATMs are predominantly a US phenomenon; European and Asian markets tend to favour traditional methods of capital-raising — often with pre-emptive rights — over opportunistic issuances.

At a practical level, few overseas small or mid-cap stocks have anything like the liquidity of American ones to make an ATM feasible. The Dutch and British governments have used on-market selling programs to unload shares in banking giants like ABN Amro and NatWest, but only with pre-existing holdings from financial crisis-era rescues.

For Microstrategy, the ATM offers a juicy arbitrage play. The company’s stock trades at a roughly 2.8 times premium to the value of its bitcoin holdings, largely due to its leveraged balance sheet. So each share sold through the ATM essentially represents nearly three bitcoins’ worth of value, while the proceeds buy just one bitcoin. This means that more stock increases the bitcoin per share.

Or as Big Brother might say, “dilution is accretion.”

Two scenarios could disrupt this fandango. First, if bitcoin trades down, the premium to net asset value (NAV) might narrow or flip to a discount. Second, the continued issuance of stock might eventually erode the premium, forcing shares down to the underlying bitcoin value. But for now, both risks feel like a long way off.

The premium to NAV also means MicroStrategy can layer on more leverage, which in a rising bitcoin market only widens the premium. So far in 2024 MicroStrategy has issued four convertible bonds for a total of $3.2bn, locking in low- or zero-cost financing, to buy even more bitcoin. The high volatility and market liquidity of MicroStrategy shares mean that it can achieve particularly attractive terms on a convertible.

This strategy — borrowing in US dollars (which management expects to be worth less) to buy bitcoin (which it expects to appreciate) — is atypical for a carry trade, given bitcoin’s zero yield. But as MicroStrategy has been able to issue at zero or sub-1 per cent, its position doesn’t have much, if any, negative running cost.

The convertible bond also means that if the stock price rises, MicroStrategy can redeem the debt with shares trading at a premium. If not, the company must either roll over the debt (feasible, but only if markets co-operate), use cash flow from its legacy software business (tricky, given the business lost $18.5mn last quarter), or sell some of its bitcoin (blasphemously sacrilegious).

The serial issuance of convertible bonds in essence represents a same-way leveraged bet on currency debauchery.

In short, MicroStrategy’s “21/21 plan” will pay huge dividends (seriously, not literally, of course) as long as bitcoin stays high and keeps climbing. A sharp and prolonged downturn could upend these assumptions and turn a virtuous cycle into a vicious spiral.

MicroStrategy’s announcement also spotlights a curious contradiction. SEC rules tightly restrict management from hyping their stock and require risk factors around disclosure.

Saylor doesn’t forecast MicroStrategy’s stock price, but he often makes bold predictions on bitcoin’s price which, given MicroStrategy’s holdings, directly impacts the stock price. Just recently he predicted that bitcoin would hit $13mn per coin by 2045, which would make the company’s current stash alone worth over $3tn, excluding future purchases.

For the past four years MicroStrategy has said it is going all-in on bitcoin. Now, with its 21/21 plan, it’s probably time to take its statements seriously — and literally.