An In-Depth Look at MicroStrategy's Opportunities and Risks: Davis' Double Click and Double Kill

Author: @Web3_Mario摘要: Last week, we discussed Lido's potential to benefit from changes in the regulatory environment, and hope to help everyone seize this wave of Buy the rumor trading opportunities. An interesting topic this week was the popularity of MicroStrategy's microstrategy. Many seniors commented on the company's operating model. After digesting and thoroughly researching, I have some opinions of my own, which I hope to share with you. I think the reason for the rise in MicroStrategy's stock price is due to “Davis's double click”, the business design of purchasing BTC through financing, binding the value-added value of BTC to the company's profit, and the capital leverage obtained by combining innovative design of traditional financial market financing channels has enabled the company to surpass the profit growth brought about by the appreciation of BTC held by itself. At the same time, as its holdings expand, the company has a certain BTC pricing power, further strengthening this profit growth expectation. The risk also lies in this. When the BTC market fluctuates or is at risk of reversal, BTC's profit growth will stagnate. At the same time, MicroStrategy's financing capacity will be greatly reduced due to the company's operating expenses and debt pressure, which in turn will affect profit growth expectations. At that time, unless new help can take over and further boost the BTC price, the positive premium of MSTR's stock price over BTC holdings will quickly subside. This process is also known as the “Davis Double Kill.” Why is Davis Double Click and Double Kill my friends who are familiar with it should know that the author is committed to helping more non-financial professionals understand these dynamics, so I will replay my own logic of thought. So first, let's add some basic knowledge about what “Davis double click” and “double kill” are. The so-called “Davis Double Play” (Davis Double Play) was proposed by investment guru Clifford Davis (Clifford Davis), and is commonly used to describe the phenomenon of a company experiencing a sharp rise in stock prices due to two factors in a favorable economic environment. These two factors are: l The company's profit growth: the company achieved strong profit growth, or optimization of its business model, management, etc. led to an increase in profits. l Valuation expansion: As the market is more optimistic about the company's prospects, investors are willing to pay a higher price for it, thereby boosting stock valuations. In other words, valuation multiples such as the price-earnings ratio (P/E ratio) of stocks expand. The specific logic driving “Davis Double Click” is as follows. First, the company's performance has exceeded expectations, and both revenue and profits are growing. For example, good product sales, increased market share, or successful cost control will directly lead to the company's profit growth. At the same time, this growth will also increase the market's confidence in the company's future prospects, leading investors to accept a higher P/E ratio, pay higher prices for stocks, and begin to expand in valuations. This positive feedback effect of a combination of linearity and index usually causes stock prices to rise at an accelerated pace, the so-called “Davis double hit.” To illustrate this process, let's say a company's current price-earnings ratio is 15 times, and its future profit is expected to increase by 30%. If investors are willing to pay 18 times the price-earnings ratio due to the company's profit growth and changes in market sentiment, then even if the profit growth rate does not change, the increase in valuation will drive the stock price to rise sharply. For example: l Current stock price: $100l Profit increase by 30%, which means that the profit per share (EPS) will increase from $5 to $6.5. l The price-earnings ratio increased from 15 to 18. l New share price: $6.5 × 18 = $117 The stock price rose from $100 to $117, reflecting the dual effects of profit growth and valuation increase. “Davis Double Kill”, on the other hand, is the opposite. It is commonly used to describe the rapid decline in stock prices due to the combined effects of two negative factors. The two negative factors are: l Decline in the company's profit: The decline in the company's profitability may be due to factors such as reduced revenue, rising costs, and management errors, resulting in lower profits than market expectations. l Valuation contraction: Due to declining profits or poor market prospects, investors' confidence in the future of the company declined, leading to a decline in its valuation multiples (such as price-earnings ratio) and a decline in stock prices. The whole logic is as follows. First, the company failed to achieve the expected profit target or faced operational difficulties, leading to poor performance and declining profits. However, this will further worsen the market's expectations for the future. Investors have insufficient confidence, are unwilling to accept the current overestimated price-earnings ratio, and are only willing to pay a lower price for the stock, leading to a drop in valuation multiples and a further drop in stock prices. Same example...