MicroStrategy Plans to Buy Another $2B in Bitcoin as Massive Dilution Vote Looms

Bitcoin (CRYPTO: BTC) buying juggernaut MicroStreetgy (NASDAQ:MSTR) wants to buy another $2 billion worth of the cryptocurrency ahead of a shareholder vote on massively increasing the number of company shares outstanding.

In a new SEC filing, MicroStrategy disclosed that it intends to create a new perpetual preferred stock that could be converted into Class A shares or have a dividend paid on them. This move is “in furtherance of its previously announced 21/21 Plan,” where it wants to raise $21 billion each in stock sales and debt instruments, respectively.

As shareholders are set to approve MicroStrategy’s plan to increase the company’s authorized Class A shares from 330 million to 10.33 billion while also raising the number of authorized preferred shares from 5 million to over 1 billion, it is clear that CEO Michael Saylor is stepping on the bitcoin-buying gas pedal.

24/7 Wall St. Key Points:

Bitcoin buying binge

For eight consecutive weeks — and soon likely to be nine straight weeks — MicroStrategy has been scooping up buckets of the cryptocurrency. At last count, MSTR owned 446,400 bitcoins, which at current prices means the nominal data analytics firm owned $44.2 billion worth of the cryptocurrency.

Since Saylor owns enough stock that has about 45% of the total voting power, the plan to dramatically increase the number of shares outstanding is likely to be approved. But the $2 billion perpetual preferred stock offering is in addition to the 21/21 Plan the new share authorization will help implement.

A perpetual preferred stock typically pays the owner a dividend so long as the company remains solvent. MicroStrategy says the purpose of creating it is to strengthen its balance sheet and acquire more bitcoin. The balance sheet does need shoring up.

Downside risk getting amplified

MicroStrategy has taken on significant amounts of debt to buy bitcoin and it plans on taking on even more. Long-term debt has doubled over the past year, growing from $2.18 billion in last year’s third quarter to $4.21 billion this year. It has just $46.3 million in cash and equivalents. Company losses from the data analytics business widened from $143 million a year ago to $340 million this year.

Right now MicroStrategy is benefiting from the bull market in Bitcoin, but it could face significant problems if the crypto’s price suffers a major correction. MSTR stock is up 438% over the past year as BTC prices jumped over the $100,000 threshold, but an extended bitcoin downturn that pulled MicroStrategy’s share price down below the conversion price on all that convertible debt it holds could create a bitcoin-selling environment.

Conversion prices between 2027 and 2032 range from $143 per share to $233 per share. As MSTR has been much more volatile than BTC in recent months, a crypto winter could cause an avalanche in MicroStrategy’s stock. It would likely have to sell a least some of its Bitcoin hoard to repay debtholders.

Key takeaway

MicroStrategy is benefiting from a positive feedback loop. The more bitcoin it buys, the higher BTC’s price goes, making MSTR stock more valuable. Wash. Rinse. Repeat. That is, until the music stops.

MicroStrategy owns $44 billion worth of bitcoin, but its own stock is worth $94 billion, more than twice that of the crypto. That has benefited the convertible debtholders who have been able to change their notes into Class A shares at prices well above the conversion price. Although MSTR trading at such nosebleed valuations is really a relatively new phenomenon, as recently as last September shares went for less than $120 a stub. A reversion to the mean on a bitcoin correction is readily possible.

The virtuous circle of MicroStrategy’s strategy has been working in its favor. Investors just need to be wary for when the virtuous circle turns vicious, which it eventually will.