Michael Saylor‘s MicroStrategy Inc MSTR recently completed its $3 billion offering of 0% convertible senior notes due 2029. These notes provide the investors with the protection of fixed-income security while enabling them to participate in the equity upside.
What Happened: The sale of the notes was completed in two days as the initial purchasers flocked and exercised the first additional $400 million principal amount on Nov. 20, and the remaining purchase was completed on Nov. 21, 2024.
The notes were offered to qualified institutional buyers with 0% interest and no accretion of principal because of its high conversion rate of 1.4872 class A shares per $1,000 principal amount of notes, equaling an initial conversion price of approximately $672.40.
MicroStrategy’s conversion price represents a premium of approximately 55% over the Nov. 19 mid-day share price of $433.80.
A convertible note is a hybrid instrument that can be exchanged for equity in the company at a later date. These convertible notes, even though with 0% interest, still favor investors in the event of bankruptcy as bondholders are given repayment priority ahead of shareholders.
At the same time, the conversion feature of these notes eventually helps the debt holders to participate in the equity upside on conversion.
Why MicroStrategy Needs Money
MicroStrategy announced that it used the proceeds from the convertible notes offering and the issuance of shares to acquire 55,500 Bitcoin BTC/USD for $5.4 billion, at an average price of $97,862 per bitcoin, between Nov. 18 and Nov. 24.
As of Nov. 24, 2024, it held 386,700 Bitcoins at a purchase cost of $21.9 billion, at an average price of $56,761.
MicroStrategy’s “approach involves adding Bitcoin to the balance sheet, increasing stock volatility, and using convertible debt to enable low-cost capital raises.” said Bernstein’s Gautam Chhugani in a recent note.
The Bull Thesis
Bernstein sees MicroStrategy’s strategy as sustainable under favorable market conditions, raising its price target for the stock to $600 apiece, a 42% upside from its current $421.88 per share.
Bernstein projects MicroStrategy could increase its holdings to 4% of the world’s Bitcoin by 2033, assuming Bitcoin reaches $1 million per coin.
“We believe, the MSTR premium is for future growth of its Bitcoin holdings (via capital raise and price appreciation). MSTR today trades at 230% premium over its Bitcoin holdings ($32bn at market value),” Bernstein analysts said in a recent note.
Terms Of Redemption And Conversion
Furthermore, the conversion rate is subject to adjustment according to certain events. The notes can be converted to shares at the bondholder’s discretion only after Jun. 1, 2029. Apart from the conversion feature, these notes are also callable.
MicroStrategy can redeem 100% of the principal amount and call back the bonds on or after Dec. 4, 2026. The company can also call back the bonds on any date if the last reported sale price of MicroStrategy's class A common stock has been at least 130% of the conversion price.
Price Action: Shares of MicroStrategy ended 4.37% lower at $403.45 on Monday, falling further by 1.6% to $397 per share in after-hours trading.
On a year-to-date basis, the Nasdaq 100 Index is up 25.76% in 2024, while MicroStrategy outperformed the gauge with 488.81% growth in the same period. Apart from this, MSTR was up 141% and 58% in the last six months and one month, respectively.
According to Benzinga Pro data, MicroStrategy has a consensus price target of $449.5 based on the ratings of 12 analysts. The high is $690 issued by BTIG on Dec. 11, 2023. The low is $140 issued by Jefferies on Nov. 10, 2022.
The average price target of $563.33 between TD Cowen, Barclays, and Benchmark implies a 41.90% upside for MicroStrategy.
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