Opportunity and Risk Analysis of MicroStrategy: Davis Double Hit and Double Kill

Last week we discussed the potential for Lido to benefit from changes in the regulatory environment, hoping to help everyone seize this trading opportunity. This week's topic is quite interesting, focusing on the hype surrounding MicroStrategy, with many experts commenting on the company's operational model. After digesting and conducting in-depth research, I have some personal insights I would like to share with everyone.

I believe the reason for the rise in MicroStrategy's stock price is the "Davis Double-Play" effect. By financing the purchase of BTC, the company's business model ties BTC appreciation to its own profitability, and leverages innovative financing channels in the traditional financial market to obtain financial leverage, enabling the company to achieve a profit growth capability that surpasses merely holding BTC. At the same time, with the expansion of its holdings, the company has gained a certain degree of BTC pricing power, further reinforcing this profit growth expectation.

However, risks also stem from this. 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 affected, which will undermine profit growth expectations. At this time, unless there are new factors that can drive BTC prices up, the relative premium of MSTR stock price to BTC holdings will quickly converge, a process known as the "Davis Double Kill."

What is the Davis Double Hit and Double Kill

"Davis Double Play" ( is a term proposed by investment master Clifton Davis, used to describe the phenomenon where a company's stock price rises significantly due to two factors in a favorable economic environment:

1. Company profit growth: The company has achieved strong profit growth, or the optimization of business models, management, and other aspects has led to an increase in profits.

2. Valuation Expansion: The market is more optimistic about the company's prospects, and investors are willing to pay higher prices, driving up stock valuations.

The specific logic driving the "Davis Double Click" is: the company's performance exceeds expectations, with revenue and profit growth. For example, strong product sales, an expanded market share, or successful cost control lead directly to profit growth. This growth simultaneously enhances market confidence in the company's future prospects, and investors are willing to accept a higher price-to-earnings ratio, paying a higher price for the stock, leading to an expansion of valuation. This positive feedback effect usually results in an accelerated rise in stock prices.

The "Davis Double Kill" is the opposite, describing the combined effect 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 reduced revenue, rising costs, management errors, etc., leading to profits falling below expectations.

2. Valuation contraction: Due to declining profits or a deteriorating market outlook, investor confidence in the company's future decreases, leading to a decline in valuation multiples and a drop in stock prices.

This resonance effect usually occurs in high-growth stocks, especially technology stocks, as investors tend to have higher expectations for the future growth of these companies. However, these expectations often include a lot of subjective factors, which leads 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 the capital gains generated by acquiring BTC through equity dilution and bond issuance. As BTC appreciates, all investors' equity will increase, 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 leveraged returns obtained from its increased financing capacity. Considering that MSTR's total market capitalization is at a premium relative to the total value of its held BTC, as long as this state is maintained, whether through equity financing or convertible bond financing, the funds obtained to purchase BTC will further increase the equity per share. This gives MSTR a different profit growth capability compared to a BTC ETF.

For Michael Saylor, the premium of MSTR's market value over the value of its held BTC is a core factor in the viability of its business model. Therefore, his optimal choice is to continuously finance while maintaining this premium, increasing market share, and gaining more pricing power over BTC. The continuous enhancement of pricing power will further boost investors' confidence in future growth in the context of high price-to-earnings ratios, enabling the company to complete fundraising.

In summary, the secret of MicroStrategy's business model lies in the fact that the appreciation of BTC drives the company's profits up, and a positive growth trend in BTC indicates that the profit growth trend for the company is also positive. Under this "Davis Double Play" support, MSTR's premium is starting to expand, and the market is betting on how high of a premium valuation MicroStrategy can achieve for subsequent financing.

![In-depth Analysis of MicroStrategy's Opportunities and Risks: Profit and Loss are from the Same Source, Davis Double Hit and Double Kill])https://img-cdn.gateio.im/webp-social/moments-5ce991a09a7ecf096206bda8173bcc8c.webp(

The Risks Brought by MicroStrategy to the Industry

The main risk that MicroStrategy brings to the industry is that this business model will significantly increase the volatility of BTC prices, acting as an amplifier of fluctuations. This is due to the "Davis Double Kill," and the phase when BTC enters a high-level oscillation period is when the entire domino effect begins to collapse.

When the increase in BTC slows down and enters a period of volatility, MicroStrategy's profits inevitably begin to decline. In MicroStrategy's business model, profits are transparent and equivalent to real-time settlement. Due to the scale of its holdings and the BTC price being public information, investors can understand its real profit level in real-time, with no lag effect. Therefore, the stock price has already accurately reflected all its profits, making it meaningless to pay attention to its holding costs.

As BTC growth slows down and enters a consolidation phase, MicroStrategy's profits will continue to decrease, potentially even reaching zero. At this point, fixed operating costs and financing costs will further shrink corporate profits, possibly leading to losses. This oscillation will continuously erode the market's confidence in the subsequent development of BTC prices, which will in turn translate into doubts about MicroStrategy's financing capabilities, further undermining expectations for its profit growth. In the resonance of these two factors, MSTR's positive premium will quickly converge.

In order to maintain its business model, Michael Saylor must maintain a positive premium status. Therefore, selling BTC to raise funds for stock buybacks has become a necessary operation, which is the moment MicroStrategy began selling its first BTC.

When premium convergence occurs, if Michael Saylor determines that MSTR's price-to-earnings ratio is undervalued due to panic, then selling BTC to raise funds and repurchasing MSTR from the market is a profitable operation. At this point, the effect of reducing the circulation on amplifying the equity per share will outweigh the effect of reducing equity per share due to the decrease in BTC reserves. After the panic ends and the stock price rebounds, the equity per share will thus become higher, which is beneficial for subsequent development.

Considering Michael Saylor's current holdings, as well as the fact that liquidity usually tightens during volatile or downward cycles, when he starts to sell, the decline in BTC prices 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, which in turn forces him to sell BTC to repurchase MSTR, at which point the "Davis Double Kill" begins.

In addition, the investors behind MicroStrategy are a group of influential institutions that cannot stand by and watch the stock price go to zero without taking action, which will inevitably put pressure on Michael Saylor, forcing him to take responsibility for market value management. Moreover, with the continuous dilution of shares, Michael Saylor's voting power has fallen below 50%, and this trend appears to be unavoidable.

Risk Analysis of MicroStrategy's Convertible Bonds

Although MicroStrategy's convertible bonds seem to have no repayment risk before maturity, their debt risk may still be reflected in the stock price in advance. The convertible bonds issued by MicroStrategy are essentially bonds with an embedded free call option. At maturity, creditors can request the company to redeem them in stock equivalent at an agreed conversion rate.

However, there are also protective measures for MicroStrategy here. The company can actively choose the redemption method, using cash, stock, or a combination of both, which is relatively flexible. If funds are abundant, it can repay more in cash to avoid dilution of equity; if funds are limited, then it can use more stock. Moreover, this convertible bond is unsecured, so the risk associated with repayment is indeed not large. Additionally, if the premium rate exceeds 130%, MicroStrategy can also choose to redeem it at par value directly in cash, which creates conditions for refinancing negotiations.

The main investors in this convertible bond are hedge funds, which use it for delta hedging to earn volatility returns. The specific operation involves purchasing MSTR convertible bonds while shorting an equivalent amount of MSTR stock to hedge against the risks posed by stock price fluctuations. As the price develops subsequently, hedge funds need to continuously adjust their positions for dynamic hedging.

When the price of MSTR falls, the hedge funds behind the convertible bonds will short more MSTR shares to dynamically hedge Delta, further driving down the MSTR stock price. This will negatively impact the premium, thereby affecting the entire business model. Therefore, the risk on the bond side will be reflected in the stock price in advance. Of course, during the upward trend of MSTR, hedge funds will purchase more MSTR, so this is also a double-edged sword.

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