Is $MSTR a huge short squeeze in waiting? – March 28, 2024


This is Scott at and your Chart of the Day. I want to take a look at MicroStrategy ( NASDAQ: MSTR ).

This is a stock that myself and Dan Fitzpatrick have covered many times on the Free Chart of the Day. This turns out to be one of the most shorted stocks in the stock market right now. Bloomberg came out with an article the other day, and it is one of the highest shorted stocks with 20 percent of its total float or shares outstanding being shorted right now.

I thought to myself, who is shorting MicroStrategy ( NASDAQ: MSTR ) in the midst of a Bitcoin bull run? I mean, look at Bitcoin (BTCUSD), Bitcoin is in a nice uptrend, above all the major moving averages. You can see some of the levels that I am looking at, it’s been really strong. So why would someone short MicroStrategy ( NASDAQ: MSTR ), and who would do that?

Today, one of the shorts came out to announce their intention, and that was Kerrisdale Capital. Now, Kerrisdale Capital’s argument for shorting MicroStrategy ( NASDAQ: MSTR ) is the fact that this stock trades at a premium, versus the Bitcoin ETFs like IBIT ( NASDAQ: IBIT ) and FBTC ( BATS: FBTC ). What they are saying is, that essentially, MicroStrategy ( NASDAQ: MSTR ) is trading at a price that it should be at if Bitcoin was at $177,000.00 per coin and not $70,000.00 per coin.

They think MicroStrategy ( NASDAQ: MSTR ) is a short. They are long Bitcoin, short MSTR ( NASDAQ: MSTR ), and they think the stock has a chance to drop 60 percent to around the $700.00 or $800.00 range, from where it is right now. And where it is right now is right around 1,700.00. It’s down slightly after hours, but you can see the big selloff on the news today.

Now, I’ll be honest, if I didn’t know the news, I would say that this just looks like a pullback to the orange line, which is the 8-day exponential period moving average. But here’s my thought on MicroStrategy ( NASDAQ: MSTR ) and the valuation. Yes, it does trade at a premium, but that’s because it’s a stock and not an ETF like IBIT ( NASDAQ: IBIT ) and FBTC ( BATS: FBTC ).

Those shouldn’t trade at a premium because they are one-to-one. If you buy $100,000 worth of IBIT ( NASDAQ: IBIT ), then essentially, you are buying $100,000.00 worth of Bitcoin, via an ETF. But if you buy $100,000.00 worth of MicroStrategy ( NASDAQ: MSTR ) you’re buying a company that holds Bitcoin on its balance sheet.

And so I believe it’s not really the same thing. I think MicroStrategy ( NASDAQ: MSTR ) and most companies in the stock market do trade with some sort of premium and the value of the assets that they hold. We hear all the time, the stock market is expensive, versus whatever. And so I don’t necessarily disagree that, yes, it does trade at a premium.

But let me tell you this right now, this is not nearly as high of a premium as it’s had in the past. If I bring up the MSTR tracker, we can see, over time, MSTR ( NASDAQ: MSTR ) has traded at a three times NAV premium, at a five times, and even as high as a six times premium. And that’s back when MSTR ( NASDAQ: MSTR ) had way less Bitcoin than they have right now.

And so I think that Kerrisdale Capital is a bit early on this trade because we’re not even really in the throws of the Bitcoin bull market. We haven’t even hit the halving yet. And typically, the best performance for Bitcoin happens 9-12 months after the halving. And so I’m surprised that Kerrisdale Capital is not flipping it the other way. I think that they should, in this case, be short Bitcoin and long MicroStrategy ( NASDAQ: MSTR ) because it does trade at a premium. But I don’t manage their money, and they didn’t ask me.

So with that said, I definitely want to keep an eye on MicroStrategy ( NASDAQ: MSTR ) for a potential short squeeze, because Kerrisdale Capital is not the only people that have thought of this spread before. On the way up there was another fund that allegedly was doing this exact same spread and they ended up covering their short on MSTR ( NASDAQ: MSTR ) and blew out from what I understand.

So is it different this time? This long Bitcoin short MSTR ( NASDAQ: MSTR ) spread got a lot more news this time around, so maybe it is different. But my fear is, that if Bitcoin starts to run, people are still going to run to MicroStrategy ( NASDAQ: MSTR ) as a potential proxy. Kerrisdale Capital could be at risk of a massive squeeze to the upside. That’s what I’m watching for here on MSTR ( NASDAQ: MSTR ). I’m watching for strength to come into Bitcoin and then further strength to squeeze out some shorts on MSTR ( NASDAQ: MSTR ).

As I told you before, 20 percent of the float of MSTR ( NASDAQ: MSTR ) is currently held short. So if we get some big news in Bitcoin we could see some flaming shorts leave this trade really quickly. So this is definitely one that I think you should watch very closely over the next couple of months.

I know at this point, some people are going to say, yeah Scott, but he’s issuing shares. He’s selling shares to buy Bitcoin. But here’s the thing, he’s selling shares at a premium to where prices are right now. The last funding round that he did to buy a billion dollars of Bitcoin was done at around $2,400.00 per share. That’s a pretty big premium to where the stock is right now, and those shares don’t come due until 2030-2031.

So it’s really a non-issue for anyone who is short-term trading this idea. Like I said, while I don’t disagree with Kerrisdale Capital, I just think they’re early. And usually, being right but early, a lot of times in the stock market simply means you’re wrong, but we’ll see how it plays out.

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