Key Takeaways
- MicroStrategy’s premium over its Bitcoin holdings has decreased, trading at approximately 1.3x its market-adjusted net asset value (mNAV), down from over 2x previously.
- Several analysts have lowered their price targets for MicroStrategy due to the declining premium, slower Q4 Bitcoin price momentum, and a decrease in capital issuance pace.
- The company reported a $2.8 billion net income for Q3 and $3.9 billion in unrealized gains on its Bitcoin holdings, though the pace of value appreciation has slowed.
- MicroStrategy is increasing the yield on its preferred shares as a primary funding method to maintain capital raising capabilities amidst the lower premium.
- Despite concerns, major rating agencies maintain buy-equivalent ratings for MicroStrategy, and the stock saw a moderate rise following the earnings report.
MicroStrategy’s Bitcoin Premium Shrinks Despite Strong Q3 Earnings
MicroStrategy’s valuation premium relative to its Bitcoin holdings has seen a notable decline, even as the company announced a substantial $2.8 billion net income beat for the third quarter. Data indicates that the company’s stock now trades at approximately 1.3 times its market-adjusted net asset value (mNAV).
This figure represents a significant drop from earlier periods when the premium exceeded 2x. This shift occurred when investor enthusiasm for MicroStrategy’s strategy of converting its balance sheet into Bitcoin was at its peak.
📊 The shrinking premium has prompted analysts to express concerns about MicroStrategy’s capacity to secure capital on favorable terms as the year progresses.
Following the company’s third-quarter earnings call, at least three financial analysts from firms including Cantor Fitzgerald, TD Cowen, and Maxim Group revised their price targets downwards. This collective action brought the stock’s average price target to its lowest point since May.
The analysts’ cautious outlook primarily stems from the reduced premium MicroStrategy holds over Bitcoin, a slower pace in Bitcoin’s price appreciation at the beginning of the fourth quarter, and a deceleration in the company’s capital issuance activities.
The company’s Q3 report also detailed $3.9 billion in unrealized gains on its Bitcoin assets. While this demonstrates that prior price movements have boosted asset value, the rate of increase has moderated.
Analysts React to Q4 Pace and Bitcoin Premium
Lance Vitanza, an analyst at TD Cowen, communicated to clients that the fourth quarter has commenced with a slower momentum compared to the preceding three strong quarters. He noted:
“4Q is off to a slow start, with reduced Bitcoin price appreciation and a dramatic reversal in Bitcoin premium leading to a very slow pace of capital issuance and quarter-to-date BTC yield measured in basis points rather than percentage points.”
Historically, MicroStrategy was recognized as a conservative enterprise software company. However, in 2020, its trajectory shifted significantly when co-founder and then-CEO Michael Saylor spearheaded a major capital allocation towards Bitcoin.
Since that strategic pivot, the company’s stock valuation has been predominantly influenced not by earnings growth, but by the volume of its Bitcoin reserves and the market multiple assigned to those holdings.
💡 This valuation methodology, known as market-adjusted net asset value (mNAV), previously saw multiples above 2x. Currently, this multiple hovers around 1.3x.
Brett Knoblauch, an analyst at Cantor Fitzgerald, explained that a lower mNAV multiple constrains MicroStrategy’s ability to raise funds through capital markets, as there is less valuation surplus available for financing. He recalled that while mNAV dipped below 1x during the Terra-Luna collapse, it subsequently recovered.
Knoblauch further pointed out that for MicroStrategy to achieve its fourth-quarter operating income guidance of $20 billion, Bitcoin would need to reach approximately $150,000 by the end of the year. At present, Bitcoin is trading just above $110,000, and its all-time high is below $127,000.
Despite the price target reductions, Cantor Fitzgerald, TD Cowen, and Maxim Group have all maintained buy-equivalent ratings for MicroStrategy’s stock. The shares experienced a rise of up to 7% on Friday, though they remain over 40% below their record peak established in November 2024.
Saylor Adjusts Strategy to Enhance Funding Capabilities
During the earnings call, Michael Saylor, now Chairman, indicated that MicroStrategy is increasing the yield on its preferred shares. He identified this as the primary avenue for funding future operations.
“We are kind of in an inflection point we believe, our multiple of net asset value has been trending down over time as the Bitcoin asset class matures and the volatility decreases.”
The adjustment to higher preferred share yields aims to bolster demand at a time when the company’s premium over its Bitcoin holdings is lower.
Phong Le, the Chief Executive Officer, elaborated that MicroStrategy is exploring international markets for capital raising and is considering the potential for exchange-traded funds (ETFs) backed by these preferred shares.
The company currently has approximately $689 million in annual interest and dividend expenses, underscoring the necessity for securing consistent and reliable funding sources.
Mark Palmer, an equity research analyst at Benchmark Equity Research, suggested that the increased yield on preferred shares would likely result in only a modest rise in overall expenses. He contrasted this with the significant capital the company could raise and the Bitcoin it could acquire.
Palmer has maintained a buy rating on MicroStrategy.
Final Thoughts
MicroStrategy continues to navigate market dynamics with its significant Bitcoin holdings, facing both investor scrutiny and strategic adjustments. While Q3 results showed profitability, the decreasing premium over Bitcoin presents ongoing challenges for future capital generation and valuation.
The company’s pivot to higher preferred share yields signals a proactive approach to maintaining financial flexibility. Despite analyst price target cuts, the underlying buy ratings suggest continued confidence in MicroStrategy’s long-term strategy, contingent on Bitcoin’s performance and the company’s capital management.