Bears watch MicroStrategy ahead of NASDAQ 100 inclusion

The higher MicroStrategy (MSTR) climbs, the more eyes it attracts. As the company’s market capitalization has swelled, veterans of finance are questioning its growth prospects — including some of its fans’ unique or redefined financial terms.

For example, a chartered financial analyst created a video questioning whether MicroStrategy’s supposed “bitcoin (BTC) yield” metric might have pyramid scheme mechanics. Many other critics have called the Michael Saylor-led BTC acquisition company a type of pyramid scheme.

Unlike a pyramid scheme, however, MicroStrategy doesn’t guarantee returns, distribute dividends, promise earnings from equity investment, or make any payouts to later investors from the proceeds of earlier investors.

Still, some critics are simply convinced that something must be wrong. Indeed, Ben Hunt laughed at a MicroStrategy investor redefining a conservative, 5% interest on cash equivalents as meaningful “earnings.”

Casting the claim as representative of deluded mania among MicroStrategy bulls, he flagged the irresponsible idea that such interest should deserve any earnings multiple whatsoever, let alone a 50X multiple.

MicroStrategy bought 423,650 BTC on incredible leverage

Investors who bought in early to MicroStrategy’s BTC-gobbling journey are certainly enjoying a meteoric rise; shares are higher even than its dot com bubble peak. MSTR is up 530% year-to-date and has a NASDAQ 100 index inclusion decision scheduled for tomorrow at 4pm New York time — a possibly bullish catalyst.

Skeptics think investors coming in now, however, are late to the party and might be left holding the bag.

MicroStrategy has made no secret of its primary operation as a corporation: acquiring large amounts of BTC using leverage. Most recently, it funded the purchase of 21,550 BTC.

In essence, MicroStrategy diluted its own stock to buy more BTC at close to the currency’s all-time high.

A slide from MicroStrategy’s third-quarter investor meeting describes its strategy as “intelligent leverage.” It says the company’s BTC holdings increased from 189,150 to 252,220, a 33.3% jump.

During the same quarter, the outstanding assumed diluted shares increased from 20,764,000 to 23,510,000, a 13.2% increase.

Despite this dilution, in MicroStrategy’s view, its “assumed diluted shares” have actually increased its BTC holdings. Thanks to investors bidding a premium for MSTR above and beyond its BTC holdings, the company’s ability to sell shares and convertible debt to capture that premium allows it to accrete BTC on an assumed diluted share basis.

Read more: Why is MicroStrategy nowhere close to its all-time high, unlike bitcoin?

Skeptics see doom on the horizon for MicroStrategy

Of course, if or when MSTR’s premium to its BTC holdings were to ever collapse, this mechanism would cease to function. As long as MSTR trades at a premium to the company’s BTC, however, the company can continue to accrete BTC on a fully diluted basis.

For many years in the future, MicroStrategy also has to repay its loans via repayment to lenders in cash or stock. If it cannot pay those loans off, lenders are senior to shareholders.

Bears think these future debt obligations are a serious concern. Bulls consider these loan amounts — typically in the high hundreds of millions or low billions of dollars per year for the next few years — as negligible obligations for a company whose market capitalization is now $94 billion.

MicroStrategy is staking its future on BTC’s ability to continue to appreciate. Skeptics think CEO Michael Saylor is the leader but his shareholders are the sucker at the table.

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