News on Macro Economic Data
There was some mixed news regarding the economy this past week:
On the positive side, the core personal consumption expenditures index (PCE), the Fed’s favored metric for inflation (excluding gas and food), rose 0.2% and 3.5% for the year, which was in line with expectations. Consumer spending came in at a 0.2% increase in October. Taking inflation into account, consumer spending was flat for the month. Additionally, a couple of usually hawkish Fed governors seemed to soften their stance regarding additional rate hikes.
On the flip side, the manufacturing sector contracted for the 13th straight month, with a PMI of 46.7, and new orders remained in contraction, backorders are lower by 2.9%, and multiple analysts point to the coming slowdown in the economy. While the slowdown would support the Fed’s objective, and assist with reducing inflation, it’s important to point out that M2 (money supply) has increased by 40% over the last two years, and to date, has only contracted 4%. Excessive money supply and excessive government spending may contribute to continued higher-than-wanted inflation, thus supporting the Fed’s “higher for longer” mantra.
Crypto Public Company Activity
MicroStrategy is a business intelligence firm that also owns about 0.90% of the total circulating supply of Bitcoin. Their current announced purchase of 16,130 BTC at $593M brings the company’s total holdings to 174,530 BTC at an average price of $30,252 per BTC, representing an unrealized gain of about $1.35B.
MicroStrategy began accumulating BTC in August 2020 as a hedge against inflation and to protect its cash reserves. MicroStrategy also took the path of not only converting cash to BTC, but also raising debt to fund additional BTC purchases. While the strategy was questioned at the time, there is no doubt that it has proven very profitable.
Far more interesting is an analysis of the performance of MicroStrategy in relation to the performance of its stock price. MicroStrategy stock has been a top performer over the last three years, and has grown to an $8B market cap. Yet the financial performance of MicroStrategy’s core business has struggled with profitability over the last few years, and has fluctuated between marginal revenue growth and negative revenue growth. Since initiating BTC purchases, enterprise value to revenue has grown from 1.4x in August 2020 to 19.1x today. In comparison, the software industry average EV / Rev is roughly 2.6x, and the hottest public tech company in the universe, Nvidia, has an EV/Rev of 25x.
With $6.55B in BTC holdings, and an $8B market cap, it is reasonable to assume that the underlying MicroStrategy business, while funding BTC purchases, is almost irrelevant to the share price, and that BTC holdings are driving enterprise value. Given the announcement of the most recent purchase has driven MSTR up over 4% today, is it too much to think that with MSTR holding nearly 1% of outstanding BTC, they represent the first BTC ETF?