MicroStrategy’s Bitcoin king just saw his stash fall to a grim new milestone – Fortune

It’s no wonder the flamboyant promoter is talking his book. He’s risking the solvency of his enterprise software outfit on Bitcoin’s future price (you can read the full story of Saylor’s Bitcoin saga here). And on Oct. 13, the financial standing of his Bitcoin holdings reached a milestone that underscored the recklessness of his wager.

At mid-morning that day, Bitcoin’s price dropped to $18,300, close to its lowest level in two years. Saylor has piled 130,000 Bitcoin on his balance sheet at a total cost of just over $3.406 billion. He financed the purchases with a $1 billion equity offering and four debt deals, a single margin loan, and three bond offerings. The sword hanging over MicroStrategy is the borrowings part: It owes $2.405 billion on the four financings. That’s $18,500 for each of the 130,000 coins in its war chest. When Bitcoin dropped below that number on Oct. 13 to $18,300, Saylor’s trove was worth less than the debt he’s obligated to repay by $26 million. Because Saylor bought the coins for $1 billion, or 30% more than they’re worth now, the money from the stock sale went to waste, diluting his shareholders by 12% and getting them zilch in exchange.

In the days that followed, Bitcoin rebounded more or less in tandem with a tech stock rally, hitting around $19,150 at mid-afternoon on Oct. 18. The gains put the value of the Bitcoin collection at a slender $85 million, or 3.5% more than the debt accumulated from the purchases.

But as the Bitcoin trove hovers around amounts MicroStrategy owes, it enjoys no margin for safety. The debts start coming due in 17 months, and by December 2025, Saylor will have to repay $855 million, and as much as the entire $2.4 billion by early 2027. If Bitcoin’s price dives, only by selling an extremely large portion of his coins can Saylor repay the earlier-maturing debt, and he won’t have enough left to cover what comes due in early 2027. By hugely leveraging a company that pre-Bitcoin had tiny debt, Saylor is putting its existence in peril.

The software business is making almost no money

Before Saylor’s Bitcoin adventure, MicroStrategy was moderately profitable, generating over $70 million in free cash flow during the good years. But shifting the focus to Bitcoin not only makes the enterprise’s finances far more fragile, it has apparently been a downer for the basic business of software. For the first six months of 2022, MicroStrategy generated just $21 million in free cash flow, or $42 million on an annualized basis. A big reason that number is so slim: the $51 million in annual interest expense MicroStrategy is paying on its Bitcoin loans. In addition, from January to December, it issued a towering $30 million in equity grants, but didn’t spend any cash buying back stocks to neutralize the looming dilution, suggesting that it’s paying employees by diluting shareholders instead of using cash flows from the software business.

The miracle: Even though MicroStrategy’s Bitcoin holdings, depending on the day, are worth slightly more or less than its debt, it still sports an impressive market cap of $2.5 billion. Since the value of its Bitcoin minus the debt is approximately zero, investors are putting a $2.6 billion valuation on the bedrock software franchise. That’s a multiple of 60 times its annualized free cash flow, not including the drag from big equity grants. And MicroStrategy is radically riskier than its competitors because bad times for the most volatile major asset in history could sink it.

You’ve got to give Michael Saylor credit. His outrageous, professor Henry Hill–like salesmanship garners a huge premium for his stock over anything you’d get to examining MicroStrategy’s numbers. But in the long run, it’s the numbers that will count. And the two that should terrify investors are the wildly fluctuating price of Bitcoin, and the immovable object of the $2.4 billion in debt.