Opportunities and Risks of MicroStrategy: Double Click and Double Kill

Last week we discussed Lido's potential benefits amid changes in the regulatory environment, hoping to help everyone seize this "buy the rumor" trading opportunity. This week's topic is quite interesting - the hype around MicroStrategy. Many industry insiders have commented on the company's operating model. After in-depth research and reflection, I have some personal views I would like to share with everyone.

I believe the reason for the rise in MicroStrategy's stock price lies in the "Davis Double-Play" effect. By designing a business model that involves financing to purchase BTC, the company ties the appreciation of BTC to its own profitability and gains financial leverage through innovative financing channels, enabling the company to achieve profit growth that exceeds the mere holding of BTC. At the same time, as the holding volume increases, the company has gained a certain degree of pricing power over BTC, further strengthening this profit growth expectation.

However, this is also the main risk faced by the company. When the BTC market experiences fluctuations or reversals, the profit growth of BTC will stagnate. Coupled with the company's operating expenses and debt pressure, MicroStrategy's financing ability will be severely impacted, which will further hit profit growth expectations. At that time, unless there are new factors that can further push up the BTC price, the premium of MSTR's stock price relative to BTC holdings will quickly shrink, a process known as "Davis Double Kill."

Davis Double Hit and Double Kill

"Davis Double Play" refers to a significant increase in stock prices of a company due to two factors in a favorable economic environment:

1. Company profit growth: The company has achieved strong profit growth, or optimization in areas such as business model and management has led to an increase in profits.

2. Valuation Expansion: The market has a more optimistic outlook on the company's prospects, and investors are willing to pay higher prices, driving up the stock's valuation.

The specific logic is: the company's performance exceeds expectations, with revenue and profit growth. This directly leads to an increase in profits, while boosting market confidence, making investors willing to accept a higher price-to-earnings ratio and pay higher prices for the stock, resulting in an expansion of valuation. This positive feedback effect usually leads to an accelerated rise in stock prices.

The "Davis Double Kill" refers to the simultaneous impact of two negative factors leading to a rapid decline in stock prices:

1. Decline in Company Profits: The decrease in profitability may be due to factors such as reduced income and rising costs, resulting in profits falling short of expectations.

2. Valuation contraction: Due to declining profits or worsening market prospects, investor confidence decreases, leading to a decline in valuation multiples and stock prices.

This resonance effect typically occurs in high-growth stocks, especially technology stocks, because investors usually assign these companies higher expectations for future growth, and such expectations often contain significant subjective factors, leading to greater volatility.

Formation of MSTR High Premium and Its Core Business Model

MicroStrategy has shifted its business from traditional software to financing the purchase of BTC, which means its profit source comes from obtaining funds through equity dilution and bond issuance to purchase BTC for capital appreciation. As BTC appreciates, the equity of all investors increases, which is similar to other BTC ETFs.

The difference lies in the leverage effect brought about by its financing ability. MSTR investors' expectations for the company's future profit growth come from the leverage gains obtained through its increased financing capability. As long as MSTR's total market value is higher than the total value of the BTC it holds in a positive premium state of (, both equity financing and convertible bond financing will further increase the equity per share. This gives MSTR a profit growth capability that is different from that of a BTC ETF.

For Michael Saylor, the premium of MSTR's market value over the value of its held BTC is the core of the business model. His optimal choice is to maintain this premium while continuously raising funds, increasing market share, and gaining more pricing power over BTC. The enhancement of pricing power will further boost investors' confidence in future growth, enabling him to complete fundraising.

In summary, the key to MicroStrategy's business model lies in: the appreciation of BTC driving the company's profit increase. A positive growth trend in BTC indicates a favorable trend in corporate profit growth. Under this "Davis Double Play" support, MSTR's premium is beginning to expand, and the market is speculating how high a premium valuation MicroStrategy can achieve for subsequent financing.

![A Deep Dive into the Opportunities and Risks of MicroStrategy: Profit and Loss from the Same Source, Davis Double-Click and Double-Kill])https://img-cdn.gateio.im/webp-social/moments-5ce991a09a7ecf096206bda8173bcc8c.webp(

The Risks Brought by MicroStrategy to the Industry

MicroStrategy's business model will significantly increase the volatility of BTC prices, acting as a volatility amplifier. This is due to the "Davis Double Kill," and the period of BTC entering a high-level oscillation is the beginning stage of this process.

As the growth of BTC slows down and enters a consolidation phase, MicroStrategy's profits will continuously decrease, potentially reaching zero. Fixed operating costs and financing costs will further shrink the company's profits, possibly leading to losses. This consolidation will gradually erode the market's confidence in BTC price development, turning into doubts about MicroStrategy's financing capabilities, thereby impacting its profit growth expectations. Under the resonance of both factors, MSTR's positive premium will quickly converge.

To maintain the business model, Michael Saylor must maintain a positive premium status. Therefore, selling BTC to regain funds for stock buybacks has become a necessary operation, which will mark the moment MicroStrategy starts selling its first BTC.

According to MicroStrategy's shareholding structure, Michael Saylor's equity stake is not high, but he has absolute voting power through a dual-class share structure. This means that, for him, the long-term value of the company far exceeds the value of the BTC he holds.

Selling BTC to buy back stocks during a consolidation phase can maintain the premium. When the premium converges, if it is judged that MSTR's price-to-earnings ratio is undervalued due to panic, selling BTC to regain funds and repurchasing MSTR is a worthwhile operation. At this time, the effect of repurchasing on the reduction of circulation amplifies the per-share equity effect, which will be greater than the effect of the reduced BTC reserve shrinking the per-share equity. After the panic ends, the stock price will pull back, and the per-share equity will thus become higher, benefiting future development.

Considering Michael Saylor's current holdings, and the fact that liquidity usually tightens during volatile or downward cycles, when he starts to sell, the drop in BTC price will accelerate. This acceleration in the decline will further worsen investors' expectations for MicroStrategy's profit growth, leading to a further decrease in the premium rate, forcing him to sell more BTC to buy back MSTR, at which point the "Davis double kill" begins.

Moreover, the investors behind this are a group of influential institutions who cannot just sit back and watch the stock price drop to zero without taking action. They are bound to put pressure on Michael Saylor, demanding that he take responsibility for market value management. Recent news indicates that, with ongoing equity dilution, Michael Saylor's voting rights have fallen below 50%. Although the specific source of this information has not been confirmed, this trend seems inevitable.

Potential Risks of MicroStrategy's Convertible Bonds

Although MicroStrategy's convertible bonds have a long maturity and seem to have no repayment risk before maturity, the debt risk may still be reflected in the stock price in advance.

The convertible bonds issued by MicroStrategy are essentially bonds with a free call option attached. Upon maturity, creditors can request to redeem at the agreed conversion rate using equivalent stock, but MicroStrategy has the option to redeem in cash, stock, or a combination of both, which provides the company with some flexibility. Additionally, if the premium rate exceeds 130%, MicroStrategy can choose to redeem directly at the cash par value, creating conditions for refinancing negotiations.

The bondholders of this type of convertible bond will only gain capital gains if the stock price is above the conversion price but below 130% of the conversion price; otherwise, they will only receive the principal plus low interest. In fact, the main investors in this type of bond are hedge funds, which use it for delta hedging to earn volatility profits.

Hedge funds hedge the risk of stock price fluctuations by purchasing MSTR convertible bonds while simultaneously shorting an equal amount of MSTR stock. As prices change, it is necessary to continuously adjust positions for dynamic hedging.

• When the MSTR stock price falls, the convertible bond Delta value decreases, requiring more MSTR shares to be shorted.
• When the MSTR stock price rises, the Delta value of the convertible bonds increases, necessitating the buyback of some short-sold MSTR shares.

This means that when the MSTR price falls, hedge funds will short more MSTR shares in order to dynamically hedge Delta, further depressing the MSTR stock price, which negatively impacts the premium, thereby affecting the entire business model. Therefore, the risks on the bond side will be reflected in the stock price in advance.

Of course, during the MSTR uptrend, hedge funds will buy more MSTR, which is a double-edged sword. Overall, although MicroStrategy's business model performs well in a bull market, it also involves significant systemic risks that investors need to approach with caution.

![In-depth Analysis of MicroStrategy's Opportunities and Risks: Profit and Loss Originating from the Same Source, Davis Double Hit and Double Kill])https://img-cdn.gateio.im/webp-social/moments-a3fab93775d2276abb8357d086b78039.webp(