Michael Saylor responded to a Bloomberg news anchor this week about Jim Chanos’ bearish trade against MicroStrategy.
According to Saylor’s characterization of the short-sale by one of history’s most successful short-sellers, there are probably three ways Chanos’ trade could go — all of which will allegedly lose money.
The hedge fund founder who made a name for himself predicting the collapse of Enron and Chinese real estate thinks MSTR is overvalued. Specifically, Chanos has placed a hedged short-sale against Saylor’s company.
Because MSTR trades at a 1.7X multiple to its $63 billion net asset value (mNAV), Chanos has shorted MSTR and simultaneously hedged his short with a long bitcoin (BTC) trade.
That hedged bet is simple. Chanos believes MSTR’s mNAV will decline over time. Because anyone can follow along, the trade has set up a showdown between two Wall Street titans.
Saylor thinks that Chanos misunderstands what MicroStrategy offers. Deflecting attention away from MSTR’s premium relative to its BTC holdings, Saylor told Bloomberg TV’s audience that he’s actually the world’s “largest issuer of BTC-backed credit instruments.”
Three ways for Jim Chanos to lose money shorting MicroStrategy
Saylor went on to explain three paths that Chanos’ short trade against MicroStrategy could take. All three paths will, in Saylor’s self-serving view, lose money for his short-selling adversary.
Saylor focused on MicroStrategy’s three publicly traded series of preferred shares — Strike (STRK), Strife (STRF), and Stride (STRD). He explained that via these dividend-yielding offerings, MicroStrategy has found another way to acquire BTC that isn’t dilutive to common MSTR shareholders.
Although Saylor used to emphasize at-the-market (ATM) share sales that literally diluted MSTR shareholders $1 for every $1 in BTC purchase, preferreds do not increase the share count of MSTR.
Instead, they encumber the future cash flow of MicroStrategy — some of which must be paid out as dividends to preferred shareholders.
In Saylor’s view, there’s plenty of appetite on Wall Street for a new series of preferred shares or other non-dilutive credit instruments. As a result, he sees three ways that Chanos’ short sale could transpire.
First, Saylor thinks that MicroStrategy’s mNAV could persist or increase for many years to come due to sustained market demand for BTC treasury companies. This is Chanos’ worst-case scenario.
Second, Saylor thinks that MSTR could trade down slightly to a “weak premium,” in which case “we’re just going to sell the preferreds” to raise money and buy more BTC.
Third, Saylor warned Chanos that if MSTR ever declined to a negative mNAV, he plans to sell more preferreds and use the proceeds to buy back MSTR stock.
Read more: MicroStrategy wannabes and the return of mNAV mania
‘No liquidation risk’ and ‘never come due’
In Saylor’s view, all three outcomes are bad news for Chanos.
Instruments like STRK, STRF, and STRD preferreds have “no liquidation risk,” “never come due” in principal repayment, and “there’s not even an interest rate risk.”
Unlike corporate bonds or dilutive common stock offerings, preferreds and other instruments could keep non-dilutive capital flowing into MicroStrategy for a very long time, Saylor believes.
Chanos, for his part, completely disagrees with Saylor that this capital-raising enterprise will be able to persist its mNAV over the long term.
Chanos explained his outlook succinctly, saying, “Shareholders are paying around $220,000 for BTC that trades around $110,000.” That is a straightforward, obvious play for a hedged short-seller.