Martin Shkreli Analyze Microstrategy (Full Analysis) (youtube.com)
‘His cost of capital is less than zero. That’s not sustainable, obviously.'
A convertible bond, if the shareprice goes up, can be very valuable, becaues then you could convert it and earn a good return, but you're protected on the downside, because you're senior secured (if company doens't pay you it goes bankrupt). Some people, however, will buy the convert and short the stock (called ‘convertible arbitrage), to hedge, because in a bankruptcy the convert is probably worth something, but your short is worth a lot of money if there’s bankruptcy. Some of this might be happening at Microstrategy. Shkreli.
Saylor gets debt and buys Bitcoin for that value, so enterprize value of company doesn't change. But the convert changes the equation, because at a high premium (currently Saylor has 50%), which removes 50% of the debt and converts it to shares, so market cap rises while holdings stay the same. Enterprize value is better (but not that much). Microstrategy has to sell a lot of converts to be a good long. Shkreli says $100b of converts and buy Bitcoin at current price, for company to be worth current stock price. $220k per Bitcoin makes Microstrategy not overvalued.
What makes Microstrategy sells converts at 50% higher than the company stock price. He's buying Bitcoin with something 50% higher than the current price of the stock. But the limit is the limits of demand for this. Shkreli.
At some point (10% of Bitcoin) does it become an overhand?
'It should be a perfect hedge' if you long Bitcoin and short Microstrategy' in the right ratio, maybe 2to1, delta hedge, because Microstrategy is leveraged. Arbitrage.
Commenter. ‘MSTR’s strategy actually reminds me of the REIT business model. Raise debt and/or equity using extremely low cost of capital, use money raised from that to buy more of a valuable asset, which is accretive to shareholders. REITs focus on increasing dividend payments to increase income per share while MSTR focuses on increasing bitcoin per share. MSTR deserves a premium to its NAV, but the key to buying shares is to do so when their nav premium is lower. Buy low nav premium, sell high nav premium.’
Another. 'You didn't mention the ATM offerings as a way to raise cash. Last week when he did the 3B in converts at 0% he also raised 4.6B through the ATM offering and bough 50k BTC with it. It is dilutive to use this of course but it is accretive in BTC per Share terms.' Reply. ‘Even if there’s some dilution, if it’s accretive on btc/share, then it worth it for sure.’
Commenter. 'Disagree with conclusion to Short MSTR and Buy BTC. First, MSTR is hard to borrow, so you pay a high borrow rate. Second, if you are wrong, you'll have to buy increasing amounts of BTC, which just won't be available. Third, central banks can print unlimited money to buy MSTR, the Swiss central bank does already.'