Why I believe MSTR is undervalued
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The mNAV or Premium to Net Asset Value is the common metric that you will find on how MSTR is valued.
Premium to Net Asset Value (commonly known as mNAV) is the company's market capitalization (shares outstanding x market price per share) minus the value of its net assets (bitcoin holdings minus debts).
If mNAV is 2x, the market price of MSTR company is trading 2x the value of bitcoin it’s holds less its debts.
Most of the time, MSTR trades at a Premium to Net Asset Value.
The common question then is why is it trading at a premium to bitcoin it holds? This rational has let outsiders (mostly non-bitcoiners) to short the stock. They don’t believe that it shouldn’t trade at premium to its bitcoin holdings.
But they are wrong because MSTR shouldn’t be valued based on Premium to Net Asset Value.
Because that is not how a stock is valued.
MSTR is not an Exchange Traded Fund (ETF).
The market price of a company is not derived solely from the market value of its net assets.
Market price is determined based on future expected cash flows.
The net assets provide a floor or minimum to the price to pay (though it can trade at a discount also). But it’s not the whole price. Because you are buying a company with expected future cash flows. You are not just buying its net assets.
Just for example, if you are looking to buy a laundry shop, the owner won’t sell that laundry shop based on the price of washing machines alone.
The seller will add a premium to the value of the washing machines. And that premium will depend on the future expected cash flows of the laundry business.
But in reality, and the stock market, that is not as simple as it sounds. Net assets & future cash flows are just models. It is not what will dictate a price of a stock or the company.
The price of a stock will be based on demand and supply. I know this is obvious. But it is important to go back to basics and understand demand and supply.
A price of a stock will continue to go up if there are more buyers than sellers. There will be more demand (more buyers) and less supply (less sellers) causing the price to go up.
You’ve got to understand the rational why MSTR has more buyers than sellers. Why these buyers are not selling and why more people will become buyers of MSTR in the future. These are the questions to asked to have conviction that MSTR will continue to go up.
Going back to the laundry business, if you know that there will be a university that will be built near the laundry business, but this is not known information to other potential buyers, you will know that the laundry business is undervalued because other people are not looking to buy it. They don’t see that demand will increase for this laundry shop because they don’t know that a university will be built nearby.
This is the secret to buying a good stock that will become a 100 bagger in Peter Lynch’s terms.
Or in Saylor’s terms, this is how 1000x your net worth, when it will take 10 years for people to know what you already know.
This is what information asymmetry is.
You have information asymmetry when you are buying something that is undervalued or cheap because you have information or knowledge that is not known to most people.
WHY I BELIEVE MSTR IS UNDERVALUED
I’m not a quant, statistician, or math guy.
So, I can’t put into numbers or have a discounted future cash flow model for what is the proper price for MSTR is today.
But I believe that MSTR is undervalued, because just like in my example of laundry shop, buying MSTR is like knowing that the company will be valuable in the future.
MSTR will become more valuable because they continue to own more bitcoin.
I know this is simple but let me explain.
To understand why MSTR is undervalued, you’ve got to understand first what bitcoin is. If you know what bitcoin is now, you will understand that MSTR is undervalued because bitcoin is not well understood.
I can say that bitcoin is not well understood because bitcoin’s value is only $1 Trillion on a $500 - $900 trillion worth of wealth.
If you believe that $1 trillion is undervalued for bitcoin and you believe that it can go to $10 Trillion or $100 trillion, you will believe that MSTR is undervalued.
WHY MSTR WILL RISE
But what would make MSTR more valuable?
MSTR will own more bitcoin.
How are they going to get more bitcoin? Right now, it’s by issuing debt to buy bitcoin. That is their business operations or cash flow. It’s generating more bitcoin.
Of course, there will be other expected cash flow that they can do in the future that are still even unknown even to them (just like when Amazon went public in 1997, they didn’t envision at that time having Amazon Web Services).
That is the rational now why people will buy MSTR the company, because MSTR will give you more bitcoin as a shareholder.
MSTR started adopted bitcoin in 2020 for their treasury needs. They adopted bitcoin as hedge to monetary debasement. As a way to store their cash balance and beat inflation.
Because they were the first publicly listed company to adopt bitcoin, bitcoin maxis bought their stock.
This is what I believe is the reason why they traded at a premium to net asset value in the beginning. Because bitcoin maxis bought their stocks.
Bitcoin maxis don’t sell and continuously buy specially during dips, both on bitcoin and I believe MSTR. I will argue that this is where the premium came from in the beginning. They have a solid base of shareholders that won’t sell.
Then they evolve to be a leverage bitcoin company by issuing shares and debt to buy more bitcoin that will result to more bitcoin for their shareholders. I believe this is now the reason why MSTR will continue to pump its price or demand. Because shareholders and future buyers of MSTR the company will want more bitcoin.
More people will discover bitcoin, that will discover MSTR, that will want MSTR.
Bitcoin today is undervalued and still relatively unknown based on market cap relative to other assets.
If bitcoin is not well understood, MSTR will even be harder to be understood.
But if you understand bitcoin, you can understand MSTR, you will know its undervalued. This is what Information Asymmetry is.
The key point I want to hammer in this post is how to properly value MSTR, it is not based on mNAV, MSTR should be valued based on the future.
Let’s go back to basics, you buy a business because you believe it is profitable. You buy a business because you are expecting future cash flows.
You buy the laundry shop because you believe you will earn more income the future because a university will be built beside it, that is the reason why you buy the laundry shop, not because of its washing machines. You don’t value the business whether it is trading at premium or discount to its washing machines. You value it based on the future cash it will generate from the future university that will be built beside it.
In MSTR case, you buy it based on the future bitcoin it will generate for you as shareholder.
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