(Bloomberg) — MicroStrategy Inc. bought $101 million worth of Bitcoin after announcing it would use perpetual preferred stock as well as common stock and debt to acquire more of the cryptocurrency.
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The Tysons Corner, Virginia-based enterprise software company turned leveraged bitcoin dealer has been buying bitcoin for nine straight weeks, as co-founder and Chairman Michael Saylor aims to bolster his bitcoin holding strategy. It contains about $44.3 billion in Bitcoin.
MicroStrategy bought 1,070 bitcoin tokens at an average price of about $94,000 on December 30 and 31, according to a filing with the U.S. Securities and Exchange Commission on Monday.
The company also announced that another $1 billion in impairment losses will be reported in the fourth quarter. This, combined with recent purchases, means that the bitcoin on MicroStrategy’s balance sheet will increase by $17.9 billion to just under $24 billion at the start of the new year, as the company switches to fair value accounting for its cryptocurrency holdings.
The company said Friday that it plans to raise up to $2 billion through one or more perpetual preferred stock offerings, which will be senior to its Class A common stock, in the first quarter. The preferred stock offering is part of its plans to raise $42 billion in capital through 2027 using market share sales and convertible debt offerings. MicroStrategy has already exceeded two-thirds of its equity targets, and Saylor said in December that the company is expected to shift more toward fixed-income markets in the first quarter.
Hedge funds have been driving some of the demand as they seek to use MicroStrategy for convertible arbitrage strategies by buying bonds and shorting stocks, essentially betting on the volatility of the underlying stocks.
MicroStrategy needs to continue raising capital to make Bitcoin purchases, as its core software business has had net losses in three of the past four quarters. By issuing perpetual preferred shares, a company can access an investor base that wants less volatility such as insurance companies, pension funds and banks, according to Benchmark analyst Mark Palmer.
MicroStrategy’s stock price closed at $330.66 on Friday, well below its record high of $473.83 on November 20. Bitcoin prices have fluctuated recently, trading around $100,000 after hitting an intraday high of $108,316 in December.
MicroStrategy being a leveraged play on Bitcoin means it can often follow price fluctuations of the cryptocurrency.
“This volatility in itself is a key element of MicroStrategy’s approach because it enables the company to tap the capital markets and particularly the convertible bond market more easily,” Palmer said. “If the company wasn’t trading this way and this volatility wasn’t there, it would be difficult for them to actually execute their strategy.”
While MicroStrategy’s volatility helps raise capital, retail investors are often more momentum driven, so they tend to be more concerned about dips. Some investors also had concerns about stock dilution from the company’s recent goals to increase the number of authorized shares of Class A common stock from 330 million to 10.3 billion to be able to raise more capital to buy Bitcoin. MicroStrategy’s stock price fell as much as 9.6% on proxy filing day in December.
Since the company has fewer shares available for issuance, it is looking for more flexibility to raise capital to continue purchasing bitcoin, but this presents challenges for shareholders, according to Adam Kobeissi, founder of The Kobeissi Letter.
“It is a loss for both parties, because on the one hand, there are people who say it is dilutive and are selling shares because they do not want to pass the mandate,” Kobeissi said. “But on the other hand, there are people who say that if it doesn’t pass, they won’t be able to continue buying Bitcoin and the whole investment strategy will be kind of broken.”
The stock raises are scheduled to be voted on Jan. 21, according to a Securities and Exchange Commission filing on Friday. Since Saylor is a major shareholder in the company, it is expected that the amendment will pass.
If passed, Kobeissi said the equity increase could make MicroStrategy shares more volatile as the company will become more powerful. While MicroStrategy has typically seen greater growth than Bitcoin, it has underperformed the cryptocurrency over the past month as the company faces other headwinds, rather than merely acting as a proxy for Bitcoin.
Ballmer, who has a “buy” rating on the stock, said he believes the stock price decline due to the proposal to raise shares is a “bit of an overreaction,” as the company’s strategy has been to issue shares to make accretive purchases of bitcoin. Which could benefit shareholders.
MicroStrategy had previously purchased more than $1 billion worth of tokens in weeks in November and December, but purchases have been smaller in recent weeks, even as bitcoin prices have fallen from record levels. With MicroStrategy well ahead of its capital goals, Ballmer doesn’t see this as a cause for concern yet.
Palmer said: “We have seen progress in the company’s strategy, which does not indicate a slowdown from our point of view, but rather is a reflection of the aggressive approach that the company has taken, especially after the US elections.” “The company’s approach to buying Bitcoin is not programmatic, it is opportunistic.”
–With assistance from Tom Contiliano.
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