is borrowing $400 million in junk bonds to buy more bitcoin, adding to the company’s bet that digital assets will outperform cash.
The Tysons Corner, Va.-based company is selling $400 million in bonds to add to its existing bitcoin holdings, according to a Monday news release. The new notes due in 2028 will be backed by claims on the business and “any bitcoins or other digital assets” acquired after the deal closes, but excluding any claim on the company’s existing digital asset portfolio, the release says.
In a filing Monday, MicroStrategy also said it expects to post a $284.5 million loss, “based on fluctuations in market price of bitcoin,” during its next earnings report. The company held over 92,000 bitcoins as of mid-May, according to company filings.
Prices on the company’s existing debt have fallen in recent months. The company’s $550 million convertible note due 2025 recently traded at 135.073 cents on the dollar, according to MarketAxess. That is down from around 200 cents at the start of April. Investors can exchange convertible debt for stock if shares hit a predetermined price.
MicroStrategy’s $1 billion convertible note due 2027 is trading at 67.307 cents on the dollar, implying a 7.089% yield. That is down from around 101 cents in February. Shares fell around 3% Monday afternoon.
MicroStrategy, which sells data analytics software and services to businesses, caught investors’ attention over the past year by betting big on bitcoin. Last year the company sold over $1.6 billion worth of convertible bonds to purchase the cryptocurrency. Shares of MicroStrategy are up over 364% from August 2020, the same month the company announced its first bitcoin investment, beating the S&P 500’s 27% gain over that period.
The price of bitcoin has declined significantly since MicroStrategy’s stock peaked, trading around $36,000 on Monday from highs in April over $62,000. MicroStrategy shares are down more than 60% from a record around $1,272 reached in February.
MicroStrategy has paid an average of $24,450 per bitcoin as of May 18, according to company filings.
MicroStrategy’s revenue has barely grown in a decade, rising to more than $480 million last year from $455 million in 2010. But the bitcoin purchases have attracted attention and new business, some analysts say. New accounts on the MicroStrategy website grew 281% in the first quarter, according to data compiled by analysts at Canaccord Genuity.
Mr. Saylor has said buying bitcoin is intended to keep the company’s purchasing power from going down. He expects a rise in inflation to erode the value of cash over time. MicroStrategy’s existing bitcoin portfolio will be held by a newly formed subsidiary, MacroStrategy LLC, the company said in Monday’s press release.
MicroStrategy didn’t immediately respond to requests for comment on the bond sale.
Prior sales have spurred some stock downgrades. Citibank analysts recommended investors sell shares despite what they described as the strongest first-quarter performance in recent memory. “The issuance of new debt to fund Bitcoin purchases is aggressive and may be a deal breaker for some software investors,” they wrote in an April note.
Companies holding bitcoin in their treasuries face an accounting risk. Because bitcoin and other digital assets are considered “indefinite-lived intangible assets” rather than currencies, even a temporary drop below what the company paid for them can force a company to write down their value. MicroStrategy posted a net loss in the third quarter thanks in part to bitcoin price fluctuations.
“If a company substitutes cash in their treasury to buy cryptocurrency, that is speculation,” said
chief investment officer at Cumberland Advisors. “They may win, they may lose, but that’s not what their basic business is.”
Others are more bullish on the company’s move. Analysts at Canaccord Genuity have placed a $920 price target on MicroStrategy shares, citing a combination of its bitcoin holdings and a healthy core software business.
“The halo effect from MicroStrategy’s Bitcoin strategy is resulting in incremental leads for the core business,” they wrote in a note on April 29.
portfolio manager at Diamond Hill Capital Management, the new MicroStrategy bonds represent a lower-risk, lower-reward opportunity for investors who may think bitcoin is currently undervalued. Unlike the company’s existing notes, which convert into stock, investors in the new issue won’t benefit from appreciation in MicroStrategy’s digital asset portfolio. But they will have the actual business as collateral.
“If bitcoin went down 75%, lenders would still have a lot of collateral coverage,” he said.
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