What is Michael Saylor Doing?

Financial markets are the ultimate arena. And right now, one gladiator stands head and shoulders above them all. His name is Michael Saylor.

Michael Saylor is the executive chairman and co-founder of MicroStrategy, a company that issues equity and debt to buy Bitcoin. It also happens to run a software business.

The President and CEO of the company opened the recent earnings call by talking about their Bitcoin accumulation strategy. They didn’t mention the results of the software business until nine minutes into the call, when they revealed that it generated $116 million in revenue, which was dwarfed by $134 million of expenses. So how did a company that lost $18 million in revenue in the most recent quarter manage to generate one of the greatest runs in the history of capital markets? Let’s dive in.

I asked Chart Kid to make this on Wednesday morning, comparing the market cap of MicroStrategy to some other huge companies like Starbucks and Nike. It’s since pulled back to ~$95 billion, but either way, something really wild is happening.

Michael Saylor deserves a lot of credit for this. You might think he’s crazy. You might not believe he deserves any credit at all for “getting lucky.” And that’s fine. But, he called his shot and then hit a home run. You have to tip your cap.

MicroStrategy started buying Bitcoin on August 10, 2020. BTC is up 720% since then. MSTR is up 3,313% over the same time. Needless to say, no stock in the S&P 500 has come close to matching those returns. So how did he do it?

“Intelligent leverage” is what they’re calling it.

In the first nine months of the year, their diluted shares outstanding rose 13.2%. Their total Bitcoin holdings rose 33.3% over the same time. Here’s how they described their strategy on their most recent earnings call:

“Our objective continues to be to accumulate Bitcoin holdings at a faster rate than we issue shares, and we have demonstrated a solid track record of doing so. To assess our performance in achieving this strategic objective, we introduced a new key performance indicator last quarter, which we refer to as BTC Yield. To reiterate again, we define BTC Yield as a period-to-period percentage change in the ratio of our total bitcoin holdings to our assumed diluted shares outstanding.”

That’s it. That’s the whole game. And right now, they’re winning 28-3 (I kid).

The stock is up 3,313% since they started buying bitcoin, but the market cap is up 7,820% over the same time. Wait, what? How? Isn’t diluting existing shareholders bad? Yes, almost always. Unless you’re using the fresh capital as leverage to buy an asset that has explosive growth. Here’s Saylor describing it:

“The more capital that we gather, the more powerful we become and the more we enrich our own shareholders. This is -- it's totally counterintuitive because everybody else in the world thinks if you sell equity, you dilute the shareholders. That's true if you don't have a use of proceeds that grows faster and yields more than the S&P 500 Index. The cost of capital is the S&P 500.”

MicroStrategy holds 331,200 Bitcoin with a current market value of ~$32 billion. The market cap is $94 billion. I’d say his game plan is working, and then some. The question is, what are the limits of this strategy? How long will it keep working? If the 264% growth in its market cap over the last three months continues, it will cross $1 trillion by the end of April. It would blow past where the largest stock is today (Nvidia) in July.

I guess anything’s possible, but this would be the craziest thing to ever happen in the history of financial markets.

So that’s the story more or less with MicroStrategy.

Now, let’s look at the mania happening with the stock and some of its derivatives.

On Wednesday, MicroStrategy became the most traded stock in the country. Ahead of Nvidia, Tesla, Amazon, and double SPY! This. Is. Crazy. And you can’t just trade MicroStrategy. That’s for whimps. You gotta sprinkle some leverage on that leverage. MSTU (T-REX 2X long MSTR) and MSTX (Defiance 2X Long MSTR) were # 5 and #8 in volume that day. Credit to my friend Eric Balchunas and his amazing team for all this data.

Remember how crazy GameStop was? That seems quaint by comparison. Look at that volume!

A massively important factor in all of this is Bitcoin, which we haven’t addressed yet.

The biggest thing Bitcoin has going for it is also the same thing that gets its haters all up in arms. “It has no use case. It doesn’t do anything. IT DOESN’T HAVE ANY FUNDAMENTAL VALUE.”

Exactly! That’s part of what makes the story work. It doesn’t report earnings. It can’t beat expectations and still drop 30%. Bitcoin is a supply and demand story, and right now, thanks to Michael Saylor and the ETFs and the deregulation via the incoming administration, there is way more demand than supply. I’m not saying that will always be the case, but it certainly is for now and the foreseeable future.

So how does this end? What stops the madness? I have a few ideas. Bitcoin falls, in which case MSTR will fall more. MSTU and the other leveraged vehicles will fall even more. That’s obvious.

Maybe the derivatives will blow this whole thing up, independent of the price of BTC. The Defiance and T-REX products were launched in August and September, and already they have a combined ~$5 billion in total assets. And the leverage being used to support these things is starting to shake the foundations of what markets can handle. We got a preview last week of what can end the party.

Bloomberg reports:

“Amid a red-hot run in the shares of MicroStrategy Inc. last month, Matt Tuttle got some bad news from the prime brokers for his booming leveraged ETF linked to the shares of the crypto-centric company.

The prime brokers — units within banks that work with their clients on activities like securities lending — had reached their limits on how much swap exposure they were willing to offer for his roughly month-old fund, the T-Rex 2X Long MSTR Daily Target ETF, which by some measures was the most volatile exchange-traded fund to ever hit Wall Street at the time of its launch.”

My friend Dave Maze, CEO at Roundhilll, was quoted in the story, saying, “It should be making us question: Has the ETF jumped the shark? We’re at a point where we’re pressing the boundaries of what the marketplace will allow.”

All credit to Michael Saylor and anyone who understood what was happening enough to profit from this. I know they get mad when TradFi people like me say anything negative. I get it. Who are we to mock something that made you so much money? Again, I get it. But, you have to admit. Ah, nevermind.

More debt. More Bitcoin. Price goes up. More equity. More Bitcoin. Price goes up. The flywheel is spinning at a dizzying speed.

I don’t see how this is sustainable. But I’m also not smart enough to know what breaks this.

If you’re new to this game, please play responsibly with money you can afford to lose, should the music stop. But while it’s playing, it remains the greatest show on earth.