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I wrote an essay discussing how to value MSTR and would love to discuss it. Here is an excerpt, full essay link at the bottom:
Detractors of MSTR often say it produces no value, that it provides no service or product, and therefore is a Ponzi scheme. This assessment is common even among bitcoiners. Many investors who understand Bitcoin fail to grasp what MSTR is doing, and what its value proposition is beyond being a “leveraged Bitcoin bet.” This essay explores MSTR’s business model, draws parallels between MSTR and its tradfi equivalents to determine reasonable stock price valuation, and discusses MSTR’s share printing.
So, what is Strategy doing? They buy and hold Bitcoin. In order to fund purchases, they issue preferred equity that pays dividends (STRC, STRK, STRF, STRD). These instruments are similar to selling bonds, but allow Strategy to raise capital without hurting their debt-to-equity ratio and provide flexibility in payment schedules. They are perpetual, and their claim on payout is advantaged compared to common-stock holders. The seniority of payout in case of bankruptcy being bondholders → preferred equity holders → common equity holders.
So, we see a model where MSTR is borrowing money, paying interest on the borrowed money, and attempting to use the borrowed money to outperform the interest rates they are paying to borrow it. At first glance, this looks like reckless gambling, or worse, getting duped: investors accept downside risk while forfeiting much of the upside—who would willingly do this?
Lets turn our inquiry to traditional financial banks and ask ourselves what exactly a bank’s business model is.
Banks provide financial services. Specifically, banks act as a trusted third party who hold and keep safe someone’s money while also giving them full access to exchange it for goods and services as needed. But bank accounts don’t cost money. So how is the bank making a profit? Not only are banks not charging for this service, but bank accounts offer money in return for customers depositing their money with them, in the form of interest. While the rates are often negligible in checking accounts, savings accounts can offer anywhere from 1% to currently upwards of 3.5% or 4% interest. So now, not only are banks providing the service of a checking account to customers, allowing them to seamlessly exchange money for goods and services, but they are paying the customer interest on their money to do so. Yet again, we must ask, how do banks turn a profit?
The primary way banks make money is by re-investing deposited capital at higher yields than they pay to depositors. That is, they re-invest the money their customers deposit, and attempt to outperform the interest rate that they pay their customers. So people are lending money to a bank in order to receive interest (as well as the service provided—the access to a checking account and everything that entails), knowing that their money is not kept in the bank, but re-invested into higher risk investments, and under a fractional-reserve system that relies on confidence and liquidity rather than full reserves. If the bank’s investments do well, the banks pay out the promised amount to their customers and pocket the difference.
This brings us back to an earlier question: who would willingly supply capital, accept downside risk, yet claim only a fraction of the upside if the investment succeeds?
The answer, in this instance, seems to be just about everyone. Why? Well, it is the understanding that banks are not reinvesting the deposited (borrowed) money into risky assets. The banks are regulated entities, they have the Federal Reserve acting as a backstop, deposits are usually FDIC insured up to $250,000, and the safe investments they have access to are generally guaranteed, such as short-term T-bills or the discount rate directly from the Federal Reserve....
The essay goes on to discuss how MSTR's business model is structurally identical to banks, and provides common metrics and comparisons for assessing the value of bank stocks to MSTR, specifically evaluating the price to book ratio (PB), Price to earnings ratio (PE) and return on tangible common equity (ROTCE).
I also discuss share dilution at the end, you can checkout the full essay here: [https://basedargo.substack.com/p/mstr-same-engine-new-fuel?r=2se54a](https://basedargo.substack.com/p/mstr-same-engine-new-fuel?r=2se54a)