For MicroStrategy in 2020, the choice was to adopt bitcoin or face death as a company.
They took their $600 million, bought $250 million of bitcoin and at the same time bought back $250 million of their own stock to give any shareholders who disagreed with the company’s strategy an exit ramp.
Why not return all $600 million to shareholders and let them decide if they want to invest in bitcoin? I think it is a fair and good question.
There are certain advantages to being a public company that individual investors can’t access on their own. Most notably, access to the capital markets, which were wide open at the time. Cheap debt, convertible debt, and the ability to issue your own stock as currency to raise money to buy more bitcoin are tools that are unavailable to individuals.
Even today with the approval of bitcoin ETFs, MicroStrategy retains these capital market advantages as a bitcoin exposure vehicle. Moreover, there are as yet no listed options on the bitcoin ETFs, so MSTR still provides investors financial tools they can’t get anywhere else in a traditional setting.
For MicroStrategy, what started as a survival tactic turned into bitcoin-financial-products-as-a-service for investors, and has now led to them rebranding as a Bitcoin Development Company and building products on-chain to grow the bitcoin ecosystem.
Bitcoin breathed life and a future into an otherwise dying enterprise.
This brings us to a possible third category of public companies that should consider buying bitcoin:
3. Cash rich, no growth companies seeking a future
It strikes me that there are probably a lot of public companies out there today that are facing the same prospects as MicroStrategy in 2020: a fast death or a slow death.
Companies that:
- have a profitable but low or no-growth operating business
- don’t have any compelling opportunities to invest in organic or inorganic growth
- have a substantial percentage of their market cap in cash
What should they do?
As Saylor pointed out, they are likely facing either a fast or slow death. And that might be the correct path for any given business to pursue! Every situation is unique.
For some businesses, accepting this fate, returning cash to shareholders, cutting costs and milking the business for cash flows in run-off mode is probably the right course of action. That is the economy naturally and efficiently reallocating capital and labor to higher and better uses.
That is the fast death.
The slow death is to sit on it or misallocate it. In fact, in a world where the cost of capital is 7% and short-term interest rates are at 5%, sitting on it is misallocating it.
The business continues to operate, probably spends a bit more than it needs to, maybe blows some shareholder money on moonshots, maybe starts incurring operating losses and covering them for years with cash on hand, as Saylor suggested was possible with MicroStrategy. Employees and management keep collecting paychecks until eventually the treasury runs dry and the company is bankrupt.
This is the slow death, which is actually the lived fate of a large percentage of public companies. Most businesses eventually go broke or are sold to larger businesses!
So should they buy bitcoin?
If the company wants to survive as a standalone entity, then it makes sense.
I’m not saying they should want to survive. But if they do, for whatever reason, I think bitcoin is an option to breathe life back into a dying company in a similar way to what MSTR did. Attract talent that wants to be “paid in bitcoin” through the company’s stock options. New talent may open new doors for the business. And, to use SMLR as an example, listed options on a $30 stock are a higher precision tool which can be useful to more people than listed options on a $1,700 stock (SMLR has no listed options at the moment, nor am I suggesting the reason for their bitcoin treasury strategy is to turn their stock into a bitcoin financial product!).
Or, perhaps a company doesn’t see any compelling areas for investment right now, but has reason to anticipate there may be in the future — think a regulatory change or approval — and they need a store-of-value asset to get the company from here to there.
4. Companies explicitly adopting a bitcoin standard
Finally, perhaps a company wished to adopt a bitcoin standard to force more effective capital allocation decisions.
A bitcoin standard means they measure every business investment opportunity versus simply buying and holding bitcoin, and they measure their success based on how much bitcoin they can accumulate, and ultimately return to shareholders.
Instead of paying cash dividends, they plan on one day paying bitcoin dividends, and they effectively communicate this.
Realistically, this perspective could apply to any company, public or private, that recognizes bitcoin’s appreciation as the true cost of capital.
In any event, the company’s reason/strategy/intention should be clearly communicated when adopting a bitcoin treasury strategy, so shareholders can decide if they want in or out.
So, what category is Semler Scientific in?
Here is what they said:
“Our Decision to Adopt Bitcoin as Our Primary Reserve Strategy
We are in the fortunate position of being a company that has consistently generated cash and has a strong balance sheet with substantial net cash. Our board of directors and senior management have been examining potential uses of cash, including acquisitions and stock repurchases. After studying various alternatives, we decided that investing in bitcoin is currently the best use of our excess cash. Bitcoin will be our principal treasury holding on an ongoing basis, subject to market conditions and our anticipated cash needs. As we embark on our new treasury strategy, our board intends to proactively evaluate our use of excess cash.”
I don’t know much about SMLR’s business or future business prospects, only what I can read in the financial statements.
Historically, they’ve grown quite nicely, compounding revenue at 41% over the past decade. The stock has returned 16.2% annually over that time. At first glance, this seems like a business shareholders would want to own for being in the Semler Scientific business, not necessarily the bitcoin business.
It seems to me like Founder and Chairman Eric Semler might simply be a bitcoiner, and is perhaps adopting a bitcoin standard for his company. Or maybe he too wishes to turn SMLR stock into a bitcoin exposure vehicle, offering Wall St. different bitcoin financial products? Neither of these things is explicitly stated in the above, though.
One thing is certain — whoever doesn’t like the strategy was provided a nice opportunity to exit. The stock was up as much as 48% in the two days following SMLR’s announcement:
