MicroStrategy is an intriguing company. Depending on your persuasion, you might find it admirable or disconcerting. To make matters clear, Microstrategy is a government-connected company.
MicroStrategy provides enterprise analytics software and services. MicroStrategy 2020 is a business intelligence company. It provides a modern analytics experience by delivering insights across multiple devices to users via hyperintelligence products, visualization, reporting capabilities, mobility features, and custom applications developed on the platform; analysts and data scientists with seamless access to trusted, governed data directly within their tools. This explanation is a euphemistic way of saying they do intelligence work for the Federales. For those who know their geography, the company is unsurprisingly located at Tysons Corner, Virginia.
We do not usually talk about companies like this one, as MSTR generates only $0.5 billion in revenue a year. The company’s market cap is only $1.6 billion, and companies of this size do not have a liquid options market associate with their stock. But there are a few attributes that have caught our attention. The company does work for the US Gov, which tends to be a good steady, and profitable business. However, a review of the company’s revenue shows that its core business is not growing at the time. So from this perspective, we are not incredibly excited about the company.
What does have us intrigued is that a government-connected company uses bitcoin to store their copious cash holding. The company has about $750 million of cash on the books. This cash represents close to 50% of the company’s market cap. Some might look at this company as overvalued. But let’s look closer. If we take out debt, the company has a market cap of $859 million. Net income is running at a $25 million annual pace. So the shares are price ad at adjusted PE of 34. This multiple is a bit high for a no-growth company.
The company has decided to hold its cash balances in bitcoin. The initial announcement said the company would keep $250 million of its cash asset in bitcoin. The company has since increased its holding to $425 million. We think this is an exciting announcement and adds legitimacy to cryptocurrency and bitcoin as a store of value. The company has plenty of cash on the book as it just repurchased $60 million of stock in the last few days.
If you are a breakout trader, you like the chart above. But we do get a little nervous when moves are a bit too intense. That said, the move to crypto creates a new and expanded shareholder base, and this may be why the shares are trading sharply higher. MSTR is an exciting way to play the tech story and an intriguing way to play the crypto story. But there is a problem for options traders. MSTR is a small-cap stock, and the open interest on the options are not very large. So performing option trades is a bit tough.
If you have a long investment time horizon, we think MSTR is an excellent stock to add to your portfolio. But what does an options trader do with thinly traded markets and large bid-offer spreads? We think one of the ways to approach the challenge is to sell downside cash covered puts. With MSTR trading at $174.90, consider the following put option.
The investors will collect $640 upfront from initiating the trade, which they get to keep if the share price trades above $165 at expiration. Since there is no downside hedge, one can lose more than the premium collected. We suspect the potential for loss is modest as the company is profitable, buying back stock, the bitcoin holding gives rise to a second way to make a buck. The breakeven level is $158.60, which is $16.30 (9%) below the current price. This cushion leaves the trade with a little room for error, so the probability of profit is higher than we usually achieve at 70%.
In this final analysis in this trade, the investor risks $174.90 to earn $6.40. If the trade works, one makes 4% on the capital put at risk for 30 days. But let’s be fair. There is no risk of bankruptcy here. So the downside risk is far-far less than the price of the stock less premium paid.
We have been looking for a simple way to sell puts on bitcoin to generate income and buy coins on the cheap. This is a simple way to generate an income, but you do not get a chance to own coins directly. Someone else will be holding them for you.
So what is the risk in this trade? The recent run-up in the stock is just a little hype around the bitcoin story. If that is the case, the share price may fall back to the $140 – $150 price range, where the share price sits for a while. There is the risk around the macro story of mitch as well. If the crypto sells off, we would expect the stock to do the same.
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‘The stock market is opening very weak this morning & MSTR is trading down about $5 from last night’s close. If you choose to participate in the trade discussed above, you might want to sell a $160 strike put at a price of around $6.25.
Photo by Bermix Studio on Unsplash
Mark is long MSTR with stock.
