An ossified saw, attributed to Mark Twain, likely apocryphal, but worthy of note nonetheless, observes that history fails to repeat, but it frequently rhymes. It’s true, at least it has been true regarding my experience with the stock market, and that’s approaching four decades.
Every eight, maybe every ten, years a sudden, cataclysmic, black-swannish event tanks the market, plunging stocks into bear-market purgatory (a twenty percent or more drop from the previous high). It’s never the same event, mind you, which is why the next event is never captured in value-at-risk modeling (and which is why the gurus that got it right foretelling the last event get it wrong foretelling the next. Encores are rare, indeed). Let us count the events: The trade deficit in 1987, the Russian debt default in 1998, the bursting of the internet bubble in 2000, the housing-induced financial crisis in 2008, the pandemic in 2020. Different events through history, similar market purgatory shortly after the event.
History rhymes at the macro level. Evidence points to it rhyming at the micro level. Company histories rhyme, too. Citigroup (NYSE: C) springs to mind as the exemplar of the “rhyming” company. When we analyze the major plungers of the past forty years, we find Citigroup standing either in the muck or to the side of it scraping it off its metaphorical shoes. (And in the instance of the 2008 financial crisis, face planted in it with no hope of recovering from its metaphorical hepatitis without the life-saving money infusion administered by the U.S. Treasury.)
Four decades is meaningful if you retain your memory. I do for the most part. I remember the 1990s very well. The potential of the nascent Internet exploded on the scene with the subtlety of the big bang. Companies that claimed to exploit the infinite potential appeared daily through initial public offerings (IPO). Once public, a doubling and tripling of equity value was not unusual in the first month of trading.
MicroStrategy (NASDAQ: MSTR) was the exemplar of the 1990s infinite-potential Internet company. Founded in 1989 by Michael Saylor, MicroStrategy perfected the new and infinite-potential concept of data mining and analysis. MicroStrategy was more sophisticated than most Internet companies of the day.
Early growth stoked the infinity fantasy. MicroStrategy’s revenue doubled each year during a run from 1990 to 1996. The company exploited investors’ craving for growth and went public on June 11, 1998. The share price doubled within a week.
Timing, as someone, somewhere observed ions ago, is everything. MicroStrategy’s was very good. The company hit the public airways as the NASDAQ Composite Index was to embark on a mountain-peak ascent that nearly tripled its value over the subsequent twenty-one months. (If you’ll remember, everything new and “Internety” wanted to list on the NASDAQ. Even NYSE-listed companies were switching to modernize their image.) As for MicroStrategy, its ascent was a moonshot in comparison – a 24-fold value increase over the same period.
It was all good until it wasn’t. The calendar rolled into 2000 with investors still intoxicated by the Internet meme (though I don’t remember “meme” being part of the lexicon then). But as the year progressed, investors began to regain their equilibrium and sobriety. Questions of value and sustainability were being asked more often. MicroStrategy shares peaked on March 10, and then the share price began to roll over on the emerging cautionary sentiment of “hmmm and what the hell is really going on.” Only a week later, March 17, the shares had already rolled 27% lower.
Depending on where you sat, the best or worst MicroStrategy experience was to come only three days later. If you sat with the bears (if you had shorted the stock or owned put options), the best was to come. If you sat with the bulls (if you owned the stock or had sold put options), the worst was to come.
A few major investors must have known something during the 27% sell-off. Something was. On March 20, MicroStrategy management announced that it would restate the company’s financial results for the preceding two years. The share price tanked 62%, or $120 per share. Investors saw $11 billion of equity value vaporized in one trading day.
MicroStrategy shares sank another 16% the day following the 62% plunge. The share price continued to helix lower over the next two years. It continued to helix to the point MicroStrategy was forced to implement a one-for-ten reverse stock split to avoid de-listing (meaning the shares were trading below a buck) on the NASDAQ..
MicroStrategy’s business was viable then. It survived. It’s viable today, except the business is notably more also-ran. Forget year-over-year revenue doubling. That’s as yesterday as the razor flip phone. Annual revenue growth limps along, when it limps at all, at a low- to mid-single-digit rate.
Management, though, remains mostly yesterday. Michael Saylor, MicroStrategy’s chairman and CEO, ran the show then. He runs it today. Saylor tapped into the meme of yesterday. He is tapped into the meme of today – cryptocurrency (a misnomer because cryptocurrencies are not currency).
And here we go again with the rhyming. MicroStrategy was into all that was new in the 1990s. It’s into all that is new in the early 2020s. MicroStrategy was a first mover in the 1990s. Its is first mover on binge Bitcoin buying in the 2020s.
MicroStrategy began buying Bitcoin in August 2020. The company has continually added to its stash since. Saylor’s acquisition strategy has grown increasingly creative along the journey. What began as an experiment with excess cash amassed during the coronavirus lockdown has yielded share sales, convertible note offerings, and crypto-collateralized loans – all to buy more Bitcoin.
The most recent binge buy was financed by a $205 million Bitcoin-collateralized loan from leading fintech and crypto-fiat gateway bank Silvergate. MicroStrategy followed through shortly after the loan closed. It purchased 4,167 Bitcoins for $190.5 million at an average $45,714 per Bitcoin. At last count, MicroStrategy owned 129,218 Bitcoins, which it paid $3.97 billion, or an average $30,700 per bitcoin. The market price is $40,262. So far, so good in the aggregate. The Bitcoin portfolio is worth close to $5.2 billion today.
MicroStrategy is mutating from a traditional operating business to a margined asset speculator. As of year-end 2021, cash was only $63.4 million, long-term debt stood at $2.15 billion (excluding capital lease obligations). Long-term debt was $486 million at the end of 2020. MicroStrategy’s equity market value before it embarked on the Bitcoin path was roughly $1.5 billion. It’s equity market value today is $5.2 billion, the same as the market value of its bitcoin holdings. (Enterprise value is $7.3 billion.)
The outlook is binary. If the Bitcoin prices increases another 30% from the price today, investors will essentially own the core analytics business free. If it falls 30%, perhaps a margin call occurs, which could ignite a liquidity crisis. It’s a roll of the dice. The future price of Bitcoin is all speculation, and it is increasingly becoming all that matters to MicroStrategy's value. Unlike the business assets, Saylor and company have no control over the value of their new dominant asset.
The history of the first movers in nascent, volcanic industries leaves much to be desired. After a few years, we find a landscape littered with the pioneers' corpses and lost wealth: many 1990s internet companies, many 2010s cannabis companies, Many 2020s SPACs. We find a lot of rhyming has occurred when we examine the fate of the first-mover pioneers.
MicroStrategy was a pioneer in the 1990s, and it survived (barely). It’s a pioneer in the 2020s. Saylor isn’t one keen to avoid tempting fate. He owns 68.1% of the voting share, so it’s his prerogative. Keep in mind that may shareholders endured a lot of misery when they followed Saylor into uncharted territory in the 1990s. Given history’s propensity to rhyme, I would think twice about following Saylor into uncharted territory again.
Every eight, maybe every ten, years a sudden, cataclysmic, black-swannish event tanks the market, plunging stocks into bear-market purgatory (a twenty percent or more drop from the previous high). It’s never the same event, mind you, which is why the next event is never captured in value-at-risk modeling (and which is why the gurus that got it right foretelling the last event get it wrong foretelling the next. Encores are rare, indeed). Let us count the events: The trade deficit in 1987, the Russian debt default in 1998, the bursting of the internet bubble in 2000, the housing-induced financial crisis in 2008, the pandemic in 2020. Different events through history, similar market purgatory shortly after the event.
History rhymes at the macro level. Evidence points to it rhyming at the micro level. Company histories rhyme, too. Citigroup (NYSE: C) springs to mind as the exemplar of the “rhyming” company. When we analyze the major plungers of the past forty years, we find Citigroup standing either in the muck or to the side of it scraping it off its metaphorical shoes. (And in the instance of the 2008 financial crisis, face planted in it with no hope of recovering from its metaphorical hepatitis without the life-saving money infusion administered by the U.S. Treasury.)
Four decades is meaningful if you retain your memory. I do for the most part. I remember the 1990s very well. The potential of the nascent Internet exploded on the scene with the subtlety of the big bang. Companies that claimed to exploit the infinite potential appeared daily through initial public offerings (IPO). Once public, a doubling and tripling of equity value was not unusual in the first month of trading.
MicroStrategy (NASDAQ: MSTR) was the exemplar of the 1990s infinite-potential Internet company. Founded in 1989 by Michael Saylor, MicroStrategy perfected the new and infinite-potential concept of data mining and analysis. MicroStrategy was more sophisticated than most Internet companies of the day.
Early growth stoked the infinity fantasy. MicroStrategy’s revenue doubled each year during a run from 1990 to 1996. The company exploited investors’ craving for growth and went public on June 11, 1998. The share price doubled within a week.
Timing, as someone, somewhere observed ions ago, is everything. MicroStrategy’s was very good. The company hit the public airways as the NASDAQ Composite Index was to embark on a mountain-peak ascent that nearly tripled its value over the subsequent twenty-one months. (If you’ll remember, everything new and “Internety” wanted to list on the NASDAQ. Even NYSE-listed companies were switching to modernize their image.) As for MicroStrategy, its ascent was a moonshot in comparison – a 24-fold value increase over the same period.
It was all good until it wasn’t. The calendar rolled into 2000 with investors still intoxicated by the Internet meme (though I don’t remember “meme” being part of the lexicon then). But as the year progressed, investors began to regain their equilibrium and sobriety. Questions of value and sustainability were being asked more often. MicroStrategy shares peaked on March 10, and then the share price began to roll over on the emerging cautionary sentiment of “hmmm and what the hell is really going on.” Only a week later, March 17, the shares had already rolled 27% lower.
Depending on where you sat, the best or worst MicroStrategy experience was to come only three days later. If you sat with the bears (if you had shorted the stock or owned put options), the best was to come. If you sat with the bulls (if you owned the stock or had sold put options), the worst was to come.
A few major investors must have known something during the 27% sell-off. Something was. On March 20, MicroStrategy management announced that it would restate the company’s financial results for the preceding two years. The share price tanked 62%, or $120 per share. Investors saw $11 billion of equity value vaporized in one trading day.
MicroStrategy shares sank another 16% the day following the 62% plunge. The share price continued to helix lower over the next two years. It continued to helix to the point MicroStrategy was forced to implement a one-for-ten reverse stock split to avoid de-listing (meaning the shares were trading below a buck) on the NASDAQ..
MicroStrategy’s business was viable then. It survived. It’s viable today, except the business is notably more also-ran. Forget year-over-year revenue doubling. That’s as yesterday as the razor flip phone. Annual revenue growth limps along, when it limps at all, at a low- to mid-single-digit rate.
Management, though, remains mostly yesterday. Michael Saylor, MicroStrategy’s chairman and CEO, ran the show then. He runs it today. Saylor tapped into the meme of yesterday. He is tapped into the meme of today – cryptocurrency (a misnomer because cryptocurrencies are not currency).
And here we go again with the rhyming. MicroStrategy was into all that was new in the 1990s. It’s into all that is new in the early 2020s. MicroStrategy was a first mover in the 1990s. Its is first mover on binge Bitcoin buying in the 2020s.
MicroStrategy began buying Bitcoin in August 2020. The company has continually added to its stash since. Saylor’s acquisition strategy has grown increasingly creative along the journey. What began as an experiment with excess cash amassed during the coronavirus lockdown has yielded share sales, convertible note offerings, and crypto-collateralized loans – all to buy more Bitcoin.
The most recent binge buy was financed by a $205 million Bitcoin-collateralized loan from leading fintech and crypto-fiat gateway bank Silvergate. MicroStrategy followed through shortly after the loan closed. It purchased 4,167 Bitcoins for $190.5 million at an average $45,714 per Bitcoin. At last count, MicroStrategy owned 129,218 Bitcoins, which it paid $3.97 billion, or an average $30,700 per bitcoin. The market price is $40,262. So far, so good in the aggregate. The Bitcoin portfolio is worth close to $5.2 billion today.
MicroStrategy is mutating from a traditional operating business to a margined asset speculator. As of year-end 2021, cash was only $63.4 million, long-term debt stood at $2.15 billion (excluding capital lease obligations). Long-term debt was $486 million at the end of 2020. MicroStrategy’s equity market value before it embarked on the Bitcoin path was roughly $1.5 billion. It’s equity market value today is $5.2 billion, the same as the market value of its bitcoin holdings. (Enterprise value is $7.3 billion.)
The outlook is binary. If the Bitcoin prices increases another 30% from the price today, investors will essentially own the core analytics business free. If it falls 30%, perhaps a margin call occurs, which could ignite a liquidity crisis. It’s a roll of the dice. The future price of Bitcoin is all speculation, and it is increasingly becoming all that matters to MicroStrategy's value. Unlike the business assets, Saylor and company have no control over the value of their new dominant asset.
The history of the first movers in nascent, volcanic industries leaves much to be desired. After a few years, we find a landscape littered with the pioneers' corpses and lost wealth: many 1990s internet companies, many 2010s cannabis companies, Many 2020s SPACs. We find a lot of rhyming has occurred when we examine the fate of the first-mover pioneers.
MicroStrategy was a pioneer in the 1990s, and it survived (barely). It’s a pioneer in the 2020s. Saylor isn’t one keen to avoid tempting fate. He owns 68.1% of the voting share, so it’s his prerogative. Keep in mind that may shareholders endured a lot of misery when they followed Saylor into uncharted territory in the 1990s. Given history’s propensity to rhyme, I would think twice about following Saylor into uncharted territory again.
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