In volatile markets, you can use cash as offense or defense. MicroStrategy Inc., MSTR 3.16% which recently had half-a-billion dollars in cash sitting around, thinks it can do both.
The company could have gotten rid of its excess cash by paying a big dividend or by buying back much of its stock. Instead, MicroStrategy bet half its total assets on bitcoin. So is this a publicly traded company or is it a hedge fund?
This foray into digital currency puts an old paradox of investing in a new light. As the great financial analyst Benjamin Graham observed long ago, the better a company is at producing goods and services, the more likely it is to pile up more cash than it needs to sustain the business. Why keep that surplus cash locked up and idle when investors could put it to better use elsewhere?
Most shareholders and corporate executives weren’t bothered much by excess cash when it yielded 5% or more. Now that yields are near zero, investors need to pay attention: When cash is trash, the pressure to take unprecedented risks with it is likely to rise.
MicroStrategy, based in Tysons Corner, Va., sells technology that enables businesses to analyze internal and external data. With software and services so cheap to produce and provide, the company keeps piling up cash.
Tale from the Crypto
MicroStrategy shares have been soaring sincethe company invested a large chunk of itscash in bitcoin...
Company saysit may buymore bitcoin
Company saysit spent $250Mto buy bitcoin
MicroStrategy performance, monthly
MicroStrategy’s revenues have barely grown over the past decade, from $455 million in 2010 to $486 million last year. Yet the company finished 2019 with $566 million in cash and short-term investments, up from $174 million a decade earlier. Even after shelling out $425 million for bitcoin and $61 million for stock buybacks since August, MicroStrategy still has $53 million in cash.
And the shares had been stagnant for years.
MicroStrategy had been one of the hottest stocks in the technology boom of the late 1990s, returning 567% in 1999. The company lost more than 90% the next year amid a Securities and Exchange Commission investigation into its accounting. MicroStrategy restated its financial results and settled administrative reporting charges, without admitting or denying them.
Three managers, including Chief Executive Michael Saylor, also settled civil accounting-fraud charges with the SEC. The executives didn’t admit or deny the charges; Mr. Saylor disgorged more than $8 million and paid a $350,000 penalty. When we spoke this week, Mr. Saylor, who is still CEO, declined to discuss the case.
MicroStrategy never recovered its lost glory. From its initial public offering in June 1998 through the end of 2019, the stock returned an average of 1.4% annually. Over the same period, the S&P 500 gained 7.2% annualized, including dividends.
But 2020 has been a whole new story. In August, when MicroStrategy announced it had invested $250 million in bitcoin, the stock jumped 9% in a day. A month later, the company declared that it would continue to put most of its excess cash into bitcoin. The stock rose 23% in two days.
At their peak on Oct. 23, the company’s shares had doubled in price since their low in early March.
MicroStrategy’s Mr. Saylor says the primary objective of buying bitcoin isn’t to make the stock go up, but to keep the company’s purchasing power from going down.
Thanks to the Federal Reserve’s immense intervention in the economy, the U.S. monetary supply is soaring—by one measure, up more than 20% this year. Mr. Saylor expects that pace to continue at 10% or 15% annually, not just in the U.S. but globally.
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“We realized that cash is trash,” he says, “and we needed either to shrink the capital structure or move our cash into something that is going to float on the flood of liquidity and not sink under the flood of liquidity.”
Of course, even as the monetary supply has doubled since late 2008 the Fed has struggled to lift inflation, as officially measured, anywhere close to 2%. While financial assets have soared and some items in the real economy have become more costly, many others have stayed flat or gotten cheaper.
Because the quantity of bitcoin is limited to 21 million, the digital currency can never be “debased,” Mr. Saylor argues, and is therefore bound to hold its value over the long run.
At this week’s price of about $13,500, MicroStrategy’s 38,250 bitcoins were worth more than $515 million, a third of the stock’s total market value. Bitcoin doesn’t only go up, though. In 2018 it bottomed below $3,200, down roughly 80% from a year earlier. (To be fair, five years ago it was about $300.)
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I asked if Mr. Saylor was nervous about putting so much of his company’s capital into such an asset.
“What would I be nervous about?” he shot back. “If I had $500 million in cash, that would make me nervous because I think it would go to zero [in purchasing power] over five years. So what’s my choice? I think bitcoin is better than gold as a store of value.”
He added, “It’s not perfect, there’s risk. But I can’t find anything better, and the option of doing nothing is more risky.”
However, MicroStrategy is no longer just a software company. Now it’s a bitcoin bet. Investors who wish to buy bitcoin could always do so themselves with the proceeds of a dividend or share buybacks. The point of buying a stock is to get a stake in a business, not to take a flier on cryptocurrency.
Idiot author had to just get a dig in there at the end lol. MicroStrategy are still a company that provides services, same as ever, and what they do with excess cash is their own business. Just because their stock pumping correlated with buying some Bitcoin doesn't mean that buying their stock is "taking a flier on crypto".
It's not really their own business. It's their shareholders business, and the sec regulates that to protect grandma from swindlers. I'm not saying micro is bad, I'm just saying they should call themselves a business + a fund wrapped in one.
The company could have gotten rid of the cash by paying a dividend or buying back stock - > already a very idiotic thing to say: if you do that your balance sheet shrinks. If you buy bitcoin your balance sheet pumps.
Thinking as a “manager”, buying back stock offers a lot of value. Basically you can use it to increase your earnings per share and lower your P/E multiple which should translate to a higher stock price.
Holding bitcoin is interesting, but as an investor, if I want more bitcoin exposure, I’ll buy more bitcoin. Coins I control and can sell when I want. Buying a company that is holding a bunch of bitcoin doesn’t make any sense to me, unless you’re looking at some sort of arbitrage play where micro strategy is worth less than the bitcoin they own, or the value of the bitcoins gains have not been appreciated by the stock.
Edit: wrong your
In volatile markets, you can use cash as offense or defense.MicroStrategy Inc., which recently had half-a-billion dollars in cashsitting around, thinks it can do both.
The company could have gotten rid of its excess cash by paying abig dividend or by buying back much of its stock. Instead,MicroStrategy bet half its total assets on bitcoin. So is this a publiclytraded company or is it a hedge fund?
This foray into digital currency puts an old paradox of investing in anew light. As the great financial analyst Benjamin Graham observedlong ago, the better a company is at producing goods and services,the more likely it is to pile up more cash than it needs to sustain thebusiness. Why keep that surplus cash locked up and idle wheninvestors could put it to better use elsewhere?
Most shareholders and corporate executives weren’t bothered muchby excess cash when it yielded 5% or more. Now that yields are nearzero, investors need to pay attention: When cash is trash, thepressure to take unprecedented risks with it is likely to rise.
MicroStrategy, based in Tysons Corner, Va., sells technology thatenables businesses to analyze internal and external data. Withsoftware and services so cheap to produce and provide, thecompany keeps piling up cash.
As the dollar continues to weaken I think we can expect more businesses to start carrying more Bitcoin (and/or alt-coins) as a means to maintain/increase their holdings value.
Smart move from Microstrategy, inflation is inevitable at this point with all this printing. The risk/reward ratio on bitcoin is very high at the moment, I think shareholders wouldn’t mind to wait a few years for a way larger dividend pay.
I mean...wat. The company in question seems to essentially have no intention of spending their cash, yet instead of just paying it out in dividends or stock buy backs they're pumping it all into bictoin (or investing in growth).
This doesn't make sense for a number of reasons. Firstly: The company has no competitive advantage buying bitcoin. If investors in this company wanted to buy bitcoin there's no reason not to just pay a dividend and let the investors buy bitcoin.
Secondly, investors can now no longer invest in MicroStrategy - since the value of your investment in MSTR is now 2/3rd determined by the performance of MSTR, and 1/3rd determined by the performance of bitcoin. Essentially attaching a hugely risky bet on bitcoin to a business analytics company.
Thirdly, even if you do buy their contention that USD is going to go to 0 (which is a wild contention) there are other assets you would buy. Commodoties, Foreign currencies, real estate - hell even Treasury Inflation-Protected bonds would all form part of your portfolio.
Fourthly, you're signing yourself up for this enormous risk of owning bitcoin. You've essentially put a $400m target on your back saying "If you can compromise our security, you could have half a billion dollars!". Now obviously security is important in all asset ownership, but most assets have far more reputable people willing to offer services to secure your possessions (like a bank).
On the other hand though this does make it nice and easy for the CEO to disappear off with half a billion of his investors money in his back pocket. I'm sure glad those investors are in safe hands though - this would be really suspicious if the CEO had previously had to settle accounting fraud charges.