Kerrisdale Capital Is Short MicroStrategy Stock, Long Bitcoin: 'Things Have Gotten Carried Away'

Mar 28, 202414:46 UTC

Short-selling investment firm Kerrisdale Capital has MicroStrategy Inc MSTR in its crosshairs. The short seller released a bearish report on the stock Thursday and announced a short position as part of a pair trade.

What To Know: MicroStrategy serves as a proxy for Bitcoin . The recent boom in crypto markets helped spark a more than 200% rally in MicroStrategy stock since the start of the year. Kerrisdale Capital believes the move higher is overdone.

“We are long bitcoin and short shares of MicroStrategy, a proxy for bitcoin which trades at an unjustifiable premium to the digital asset that drives its value. Shares of MicroStrategy have soared amid a recent rise in the price of bitcoin but, as is often the case with crypto, things have gotten carried away,” the short seller said.

Kerrisdale Capital claims that bitcoin would need to be trading at $177,000 right now in order to justify the current valuation of MicroStrategy.

Benzinga reached out to MicroStrategy for comment, but the company did not immediately respond.

MicroStrategy stock used to offer investors a unique way to gain access to bitcoin, but the asset is now easily obtainable, especially given the recent approval of several spot bitcoin ETFs, the short seller said.

“MicroStrategy's trading history and basic common sense suggests the current inflated premium will contract, much as it has on prior occasions, providing a compelling opportunity for a pair trade,” Kerrisdale said in the report.

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Kerrisdale Capital made it clear that its thesis is not built on a bearish view of bitcoin or MicroStrategy by itself, rather that the relationship between the two has become distorted.

MicroStrategy’s software analytics business only represents about 3% of the company’s total enterprise value and much of the bitcoin the company has acquired was paid for through debt financing and equity offerings, which has diluted shareholders. Kerrisdale claims that although MicroStrategy’s bitcoin holdings have increased, the amount of bitcoin per share has remained “virtually unchanged” in recent years.

Other arguments for MicroStrategy’s premium include the ability to reinvest cash flows from the software business, lack of management fees, liquidity and ease of trading, but Kerrisdale believes all of those arguments are weak.

MicroStrategy currently trades at a 2.6x equity premium to bitcoin, which is well above the historical average of 1.3x and even above the 2x premium it has been at or below on 94% of trading days since 2021, Kerrisdale said.

“Assuming the premium to NAV reverts to more historically consistent averages implies a 50% return,” the short seller said.

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MSTR Price Action: MicroStrategy shares were down 2.78% at $1,865.72 at the time of publication, according to Benzinga Pro.

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