MicroStrategy stock is up 170% this year. Short sellers say it's overvalued.

MicroStrategy stock fell 11% on Thursday. But even after factoring in that decline, the stock still surged a staggering 170% in the first quarter of 2024, thanks in large part to Bitcoin's recent rally of over $70,000.

MicroStrategy owned 214,246 Bitcoin as of March 19, the latest figure available in the company's filings with the Securities and Exchange Commission. Based on Bitcoin's late Friday price of about $69,680, MicroStrategy's cryptocurrency stake is worth just under $15 billion.

The company's total Bitcoin holdings totaled approximately $7.53 billion, with each Bitcoin purchased at an average price of approximately $35,160, according to its latest SEC filing. In other words, MicroStrategy has almost doubled its investment capital.

But Kerrisdale believes MicroStrategy investors should cash out those chips. In a humorous reference to Kenny Rogers' classic song “The Gambler,” Kerrisdale titled his research paper on MicroStrategy and Bitcoin, “Knowing When to HODL, Knowing When to FODL” . This is a play on the commonly used acronym “Hold on For Dear Life.” MicroStrategy Executive Chairman He is due to his Bitcoin evangelists such as Michael Saylor.

Kerisdale noted that MicroStrategy's software analytics business represents only 3% of the company's total enterprise value. Therefore, most investors are buying this stock as a proxy for Bitcoin.

However, there are many Bitcoin spot exchange traded funds on the market, and there is now less need to purchase MicroStrategy for crypto exposure.

Blackrock/iShares

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Loyalty.

“The days when MicroStrategy stock was a rare and unique way to access Bitcoin are long gone,” Kerrisdale said. They are now easily available through fee-based ETPs and ETFs.”

MicroStrategy could not be reached for comment.

Saylor continues to passionately post about Bitcoin on X— even though he sold some of his MicroStrategy stock last week. And Phong Le, MicroStrategy's CEO and President, said in the company's latest earnings call in February that “the combination of our business structure, Bitcoin strategy, and focus on innovation will create value for our shareholders.” “It provides a unique opportunity for creativity.”

So should bullish Bitcoin investors really short MicroStrategy? That's a risky bet. Indeed, Kerrisdale is right that instead of investing in MicroStrategy, crypto enthusiasts can buy a spot ETF or set up a Coinbase account. (Coinbase

(Incidentally, the stock price has risen nearly 70% this year.)

But it's clear that MicroStrategy's fortunes may continue to rise and fall with Bitcoin. MicroStrategy's stock price has soared nearly 1,100% over the past five years. Bitcoin soared 1,300% during the same period.

Short sellers of MicroStrategy have been losing money this year. Research firm S3 Partners said in a recent report that the company is short on nearly a quarter of its total float. According to Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, MicroStrategy is therefore “very easy to narrow down.”

This refers to the short squeeze phenomenon, where bullish investors buy the stock of a company they have bet on short, increasing the losses on the short seller and forcing them to buy back the shares they borrowed and sold.

You don't have to look beyond the meteoric rise.

This week, Trump Media & Technology Group looked into signs of what a short squeeze looks like. The former president's company soared more than 65% after completing its merger with a blank check company, as many MAGA-backed retail investors bought up heavily shorted shares.

If the price of Bitcoin, and the value of MicroStrategy's large Bitcoin stake, continues to rise, investors betting on MicroStrategy could find themselves in trouble as well.

Email Paul R. La Monica at paul.lamonica@barrons.com.