MSTR and the NAV

Trad-fi Narrative V. Reality

Apologies in advance, we will be getting into the weeds today. I have reached my limit on essays, podcasts, and YouTube videos featuring a traditional finance (trad-fi) suit-wearing MBA spouting that Strategy (MSTR) is nothing more than a Bitcoin holding company, and as such, the stock price should be trading at or near its Net Asset Value (NAV). An entire cottage industry is emerging around the trad-fi premise that NAV should be the proper metric used to estimate a fair price for MSTR stock. To be clear, the NAV is calculated as follows:

(dollar value of BTC on the balance sheet, plus cash, minus debt) divided by (# of shares outstanding).

For MSTR, that equates to a price of approximately $220 per share at the time of writing, with the actual stock price currently trading at $330. The purpose of today’s essay is to determine if there is any validity to this NAV argument.

The best place to start is to examine a Bitcoin ETF, such as BlackRock’s IBIT. We begin with a formula used to calculate the IBIT price:

X = (Y)(Z)

X = IBIT Price

Y = Bitcoin Price

Z = Bitcoin per share of IBIT (.00057)

For those who cut, slept, or were stoned for High school Algebra, here are a couple of facts about the above formula:

Fact #1: If the value of Z is kept constant, then in percentage terms, both X and Y must move in tandem. If Y doubles in value, then X doubles in value - or - if Y gets cut in half, then X gets cut in half. In short, X is a direct function of Y.

Fact #2: With Z as a constant, there is only ONE way for an IBIT investor to make money - the Bitcoin price must go up.

X = (Y)(Z) is the entire business model of IBIT. By design, Blackrock is keeping (Z) a constant (.00057). This gives purchasers of IBIT near-perfect matching exposure to the percentage fluctuations in the Bitcoin price, both up and down. The mechanism BlackRock uses to keep Z a constant is a simple one. As cash is received from investors seeking Bitcoin exposure, they immediately purchase Bitcoin with the funds and issue new shares to the investors. When investors want to cash out, BlackRock sells the equivalent amount of Bitcoin, pays off the investors with the proceeds, and retires the shares. From Blackrock’s standpoint, the trick is to stay 100% invested in Bitcoin by issuing new shares and buying when money comes in & retiring shares and selling when money goes out - it’s really that simple.

Since the BTC per share is held constant and BlackRock has no cash or debt, the IBIT price very closely tracks the IBIT NAV. To be fair, logistical issues, bid-ask spreads, and the fact that markets are not open 24/7/365 mean the market price will occasionally be a percentage or two above or below the NAV. These anomalies are temporary in nature, as they create arbitrageable opportunities because the NAV acts like a singular gravitational force, always pulling the market price towards parity with the NAV. This gravitational pull is a result of (X) being a direct function of (Y).

Now let’s compare IBIT to a (theoretical) competitor, Strategy (MSTR).

Let’s start with the same variables:

X = MSTR price

Y = Bitcoin Price

Z = Bitcoin per share of MSTR

The business model of MSTR differs from IBIT in that they have no interest in keeping Z constant. Let’s consider a few key facts that this model generates.

Fact #3 The MSTR price (X) is no longer a direct function of (Y). Sure, (Y) influences (X) - it’s just no longer the ONLY influence.

Fact #4 While market forces ultimately control the bitcoin price (Y), Z is controlled by Human beings incentivized to see the MSTR price (X) rise.

Fact #5 Since markets are forward-looking, the people controlling (Z) are incentivized to raise the stock price, and (X) is no longer completely anchored to (Y), a more accurate price formula for MSTR would look like this:

X > (Y)(Z)

The reason the = sign has been replaced with a > is that the market is correctly anticipating the value of Z to increase. So, how does MSTR control the Z variable? There are multiple levers available (ATM, Preferreds, Convertible debt), but suffice to say, they all ultimately lead to the purchase of Bitcoin, resulting in an increase in the BTC per share. Perhaps even more intriguing is the fact that every time MSTR buys BTC, thereby increasing the Z variable, it also, to some small extent, pumps up the Y variable at the same time. In other words, every BTC purchase by MSTR applies upward pressure to the stock price by simultaneously pumping both variables and, at the same time, removing supply from an already tight, finite market.

What most trad-fi people fail to account for is MSTR’s ability to repeatedly pump the Z variable. Raising the Bitcoin per share is NOT a one-time event by Strategy. In fact, since their first purchase of Bitcoin 5 years ago, they have raised the “BTC per share” seventy-seven times. That initial August 2020 BTC purchase resulted in .000223 BTC per MSTR share. That number today is over eight times higher at $0.001939 BTC per share, generating a five-year BTC per share compounded annual growth rate (CAGR) of approximately 54%. The ability to grow BTC per share is the primary reason MSTR shares should always trade at a premium to NAV.

MSTR, like IBIT, also has a NAV acting like a gravitational force pulling the MSTR share price toward parity. BUT, the MSTR stock price, unlike IBIT, also has another force (BTC per share growth) pushing the MSTR stock price up and away from the NAV. While it may be open for debate which force is stronger, one thing is certain. The MSTR model provides investors TWO ways to make money; BTC price appreciation AND BTC per share growth. The real kicker is that the returns those two paths provide are not added together; they are multiplied. Let that sink in.

If the market accepted the Trad-fi premise and MSTR was trading at parity, there would be no sense for a BTC bull to buy Bitcoin and restrict himself to a single money-making path when he could buy MSTR and give himself two paths, along with a parlay-like return. As a demonstration, imagine for a moment that the Bitcoin price had remained unchanged since Strategy’s initial purchase in August 2020. The poor soul who bought Bitcoin (or IBIT) that day would be at break-even today. Meanwhile, the person who bought MSTR, thanks to the second path, has 8x’d his BTC holdings.

The NAV effectively puts a floor on both the IBIT and the MSTR share price. With IBIT, though, the fact that they cannot grow their BTC per share puts a ceiling on the price. In effect, this collars the IBIT price, leaving it to trade at or very near it’s NAV perpetually. Contrast that with MSTR. It also has the NAV providing a floor for the stock price, but because the BTC per share is growing, there is no real ceiling on how far above NAV the MSTR stock price could trade. The only question is what is a fair premium to NAV for the MSTR stock price? Trad-fi is quick to claim there should be NO premium to the NAV value of MSTR. This writer believes it is patently absurd to price a five-year 8x (54% CAGR) of BTC per share, at Zero.

Admittedly, we cannot expect MSTR to continue growing its BTC/share at a 54% clip annually - although 2024 growth was 74% and 2025, with 4 months still to go, is at 26%. Determining a fair premium above NAV for MSTR stock requires accepting that the BTC per-share growth rate must be factored into that premium. The bigger the growth rate, the bigger the premium. Theoretically, the Bitcoin price could stay flat for 2025, and yet the value inherent in each MSTR share will be increasing this year, at a minimum, of 26%. While it is up for debate what a fair price to pay for a 54% CAGR is, I would bet my left nut the answer is not Zero.

A rising BTC per share is not the only reason MSTR should trade above its NAV. There is a second reason, and to best demonstrate it requires imagining having bought a 500k house for cash and then flipping it the following month for 600k. That equates to 100k gain, or 20% on your investment. Now imagine the next-door neighbor who bought an identical house for 500k, but only put 50k down. He also sold for 600k and netted 100k as well. But since he only put 50k down, he made 200% on his money, 10x-ing our paltry 20% return. He did this through the judicious use of debt. No doubt taking on debt comes with risk, but it also has its advantages. One of those advantages is the leverage it provides. MSTR, through the judicious use of debt, has allowed the company to control more Bitcoin than its equity alone would permit. The debt effectively creates a leveraged bet on Bitcoin’s price, which amplifies returns as the value of its BTC rises. In fact, by the time we multiply in the BTC per share growth, MSTR’s asset value will rise much faster than the Bitcoin price increase alone would justify.

There are, however, a couple of bugs in the ointment. The first is that leverage cuts both ways. As explained above, there is no doubt that MSTR will outperform Bitcoin in an up market, but it will also underperform in a down market. If you are bullish on Bitcoin, and right, then leverage is a feature, not a bug. The second fly in the ointment would be the debt itself, and what exactly constitutes judicious. The debt MSTR has taken on comes in two forms: Convertible debt & issuance of Preferred stock. Convertible debt comes with near-zero interest rates, and in a rising Bitcoin market, it will not need to be repaid, as it converts to equity. Debt with near-zero interest that doesn’t need to be repaid is arguably the best debt there is. As for the preferreds, the beauty is that they are interest-only instruments that never have to be repaid. It’s like having a mortgage where you pay only the interest, never having to pay the principal, unless you want to. The Preferreds, for all practical purposes, turn MSTR into the neighbor from above, making far greater returns than his capital alone would justify. Sounds judicious to me.

The Nay-sayers would argue that the debt, coupled with a prolonged Bitcoin crash, could put MSTR into a situation where a forced liquidation of their hoard may be necessary. This viewpoint does not align with reality. According to strategy.com, their stable of preferreds currently pays $619 million annually in interest/dividends, while their convertibles cost about $32 million per year. That equates to roughly 650 million per year on 8 billion in debt. Their software business pays the majority of those obligations. MSTR also has an ATM available on both the common and the preferreds if and whenever they need cash. Let’s not forget, they also have a Bitcoin hoard currently valued at over 72 Billion - in other words, nine times the size of their debt, and equating to more than a hundred years’ worth of interest payments. The Bears can scream over-leveraged all they want - that won’t make it true.

The 5-year history of the MSTR stock price in relation to its NAV is fascinating. Since the initial Aug 2020 purchase, the premium to NAV has ranged from .9x to 5x. It is currently at the lower end of that range at 1.5x. The BTC price has appreciated at a 58% annualised clip over those 5 years (8.4x), while the BTC per share of MSTR has grown at 54% annually (8x). When we consider the equation above, X > (Y)(Z) and the fact (Y) and (Z) are multiplied, it stands to reason the returns on MSTR over this 5 year period should be 8.4 x 8, which equates to about 67x. And yet, over that time period, MSTR has (only - lol) returned about 27x. The discrepancy is attributable to the relentless trad-fi propaganda pushing down the premium over NAV for MSTR from 4x in 2020 to 1.5 now - about a 60% drop. That 60% compression tracks, as 27x is roughly 60% off of the calculated return of 67x. The good news is that the premium to NAV, with an obvious floor at 1.0, doesn’t have much further to fall, meaning it cannot significantly crimp returns going forward. In fact, I would argue that it is likely to be rising, which would only serve to multiply future returns.

The average Mag 7 stock is growing assets at 2.5% yearly, yet trades at a 30x P/E multiple. Since Earnings end up as assets on a balance sheet, you could say they trade at 12x (30/2.5) their asset growth. Why, on God’s green Earth, would MSTR - a company far more efficient at growing assets than any of the Mag 7 trade at only a 1.5x multiple of their asset growth? Either the Mag 7 are extremely overpriced at a 12x multiple, or MSTR is grossly underpriced at a 1.5x multiple. It’s likely both. When you consider Mag 7 stocks growing assets at 2.5% yearly, that means a dollar invested today will take 29 years (72/2.5) of perfect execution and everything running smoothly for that dollar to earn a dollar of return. Compare that to MSTR, where a dollar invested today, based on the last 5 years BTC per share growth (54%) and BTC price appreciation (58%), will earn a dollar in about 5 months.

29 years V. 5 months.

To quote Heisenberg; “It’s tee-ball V. The New York Yankees”

In conclusion, if you are not yet on the Bitcoin train, I get it. It takes hundreds of hours of study to wrap your mind around BTC, and even then, not everyone is a visionary. However, to claim that MSTR should trade at its NAV demonstrates a complete inability to separate the trad-fi narrative from reality. If you can’t acknowledge MSTR should always trade at a premium to NAV, you are choosing not to think. At the end of the day, investing is a thinking man’s game. And if you are not going to do it, then good luck with another trad-fi narrative, which recommends waddling off to pay 30x earnings for the Mag 7, and then hoping all goes well for 29 years.

Enjoy the wait.