Is that a stock or a religion?
Welcome to Cautious Optimism, a newsletter on tech, business, and power.
CO will be off this Thursday and Friday. It will return Monday, rested and ripped to the gills on caffeine. — Alex
📈 Trending Up: AI model parity … AI talent wars viz geopolitical tension … corporate asset forfeiture in China … women’s sports … European animal spirits …
Trending up? Protesting OpenAI’s upcoming video model over alleged artwashing
📉 Trending Down: Masa’s ability to not do a deal … ICEs in China … open platforms? …
The Personal Consumption Expenditures Price Index (PCE) updated with October data this morning. Recall that the index — a “measure of the prices that people living in the United States… pay for goods and services” — rose 2.1% in September, down from 2.3% in August (PCE is measured on a year-over-year basis).
Morningstar reported that the market expected “the overall PCE Price Index [to report an October rise of] 0.2% on a monthly basis and 2.3% on an annual basis,” which will be up from September’s readings. What did the tape say?
PCE index rose 2.3% on a year-over-year basis (0.2% MoM), while “PCE, excluding food and energy” expanded 2.8% (0.3% MoM).
CNBC reports that '“[d]espite the rise in headline inflation, traders increased their bets that the Fed would approve another rate cut in December.” Let’s see.
IPO Watch: Pony.AI priced its shares at $13 apiece, the top-end of its $11 to $13 per share range. That means a $260 million gross haul for the Chinese self-driving company, along with “an additional $153 million [raised] in a concurrent private placement.”
WeRide, another Chinese self-driving company that listed here in the States remains a little above its own IPO price.
Musk-a16z Admin Watch
This will be a recurring segment, I suppose.
Today the news is that investors in Musk’s Twitter takeover have been given about a quarter of xAI’s equity. To help here, Musk renamed Twitter to X after buying it, and is working to turn it into a sort of MAGA super app; the MAGA side of that coin comes from Musk’s efforts to make the social platform more appealing to conservatives, the super app from his desire to have X handle payments, publishing, and other services outside its core microblogging remit.
xAI, in contrast, is a separate company in the Musk empire — as much as that is possible — that is at once a contra-OpenAI technology company and fit of pique. Putting the Musk-OpenAI suits aside, X’s owner had previously pledged to give backers of his social platform equity in his AI endeavor, as the FT reports. He has seemingly made good on that promise.
As a result, a lot of the folks who backed Musk’s takeover of X — and promptly saw the value of their investment fall as the social service saw its revenues decline — are being made whole-ish. The math is a little hard to get confidence in sans more information, but 25% of the $50 billion that xAI is reportedly set to be worth when it finishes (announces?) its current fundraise is $12.5 billion. Outside investors put $7.1 billion into the X deal, the FT says, so you can imagine that some folks are now pretty content with their X investment.
After all, if you put a bunch of capital into a social media company and instead wound up with shares in a hot new AI company backed by Musk with a 100,000 GPU cluster ready to go, would you complain?
This gets weird because some of the folks who put money into the X deal are also part of the Musk-a16z collective working to tear down — remake? — American government. Andreessen Horowitz and Sequoia invested in the X deal and thus are likely recipients of stock in xAI. a16z and Sequoia also had partners very publicly back Trump, usually on X.
Why do we care? Because technology regulation is going to be a pretty big damn topic in 2025 and beyond. And the folks constructing the next government are now ever-more enmeshed in both financial and technology terms. I presume the power that the Musk-a16z crew can bring to bear on the government will prove lucrative for their portfolios. a16z has been on the largest backers of crypto startups, for example, and it has so completely won the regulatory conversation there that I doubt it will ever turn back in this country.
Now ask yourself the direction of AI policy if a large chunk of the financial influence that helped get Trump back into power are all on the same side of the same AI trade? Who will get heard?
There’s been too much victory-lapping going on in conservative technology circles. There’s a vibe that now that Trump won, the battle the Musk-a16z crew sought to undertake is now fait accompli. I don’t think that’s entirely the case, but it does seem that amongst the ranks of the billionaires who wanted to make more money are going to.
Is that a stock or a religion?
Working with new people is always interesting in terms of what you get to learn; no two people work alike. I’ve cohosted This Week in Startups with Jason Calacanis long enough now to have sorted out a few of his patterns. One of them that I like is that Jason constantly charges headlong into whatever is going on. Then he talks about it to everyone possible. Myself included.
In contrast, I tend to stick close to a more constrained series of topics that I find intellectually stimulating and, to be honest, safer. His approach is far better at attracting attention, which, given his roots in media, isn’t a diss. I mean, I’m on his show instead of the other way around.
All this is to say that when Jason threw MicroStrategy’s bitcoin wager onto the TWiST rundown this week, I wasn’t flabbergasted. Sure, it’s not a pure startup story, but it deals with technology companies and technologies that many startups are leveraging, and it’s a topic that generates a shocking amount of intellectual passion — read: mean tweets.
Surprise or no, over two chats this week Jason and I tried to sort out what MicroStrategy is doing. To recap what I found out:
MicroStrategy is a small public software company and an enormous holder of bitcoin
The company has seen its value rapidly appreciate as it has purchased more bitcoin
MicroStrategy continues to accumulate bitcoin, with the company’s holdings of the cryptocurrency rising to 386,700 total tokens after it purchased “approximately 55,500 bitcoins for approximately $5.4 billion in cash” this week. The company paid $97,862 apiece for its new coins.
Thus far, MicroStrategy has profited off its bet. Sure, the 55,500 bitcoins it just bought are now underwater — bitcoin is worth around $94,000 per token this morning — but its overall “average purchase price […] inclusive of fees and expenses” for its held bitcoin is $56,761. Not bad.
Things get weird when we realize out that MicroStrategy is not buying bitcoin with spare cash flow. Instead, it’s aggressively raising money via convertible debt and share sales to keep its purchases flowing
That process has been greatly accelerated by the value of MicroStrategy rising far faster than the total worth of its accumulated bitcoin. (And, no, the software business is not large enough to make up the gap.)
At the price as of the time of writing, 386,700 bitcoin are worth $36,453,628,950m or about $36.5 billion. In contrast, MicroStrategy was worth $75 billion yesterday, and is set to gain 8% at the open.
For MicroStrategy, this state of affairs kicks ass. It can keep selling shares and use that money to buy more bitcoin; its convertible debts fall along similar lines, representing what Sherwood described as “effectively a call option for the debtholders.”
To sum, MicroStrategy is currently being rewarded by the market for buying bitcoin with a massive NAV premium to its underlying holdings, and it’s using that premium to raise lots of money to buy more bitcoin. So long as the market continues to award MSTR 0.00%↑ a premium, and the value of bitcoin keeps going up, the game can continue.
However, there are terms in its latest $3.0 billion worth of 2029 notes, for example, that allow the holders of the notes to get repaid in full in cash starting June 1, 2028. If, at that point, a possible conversion in a year’s time to MicroStrategy stock is unappealing, the bondholders can demand their money back.
From the SEC filing: “Holders have the right to require the Company to repurchase for cash all or any portion of their notes on June 1, 2028 at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus any accrued and unpaid special interest to, but excluding the repurchase date.”
For MicroStrategy, if it has the cash, no worries. But if it doesn’t, it would have to sell more shares (harming any potential NAV premium extant at the time), or sell bitcoin, which could lower its price and thus the company’s NAV to meet the demand.
Tailwinds become headwinds if the market turns you around.
All very interesting, right? When markets get hot, people get creative, and MicroStrategy’s Michael Saylor has become a messiah-ish figure in some investing circles. I know this because they arrived in my at-mentions in force over the last few days.
What no one has managed to explain to me, and I have failed to manage to explain to myself, is why the market affords MicroStrategy such a premium to its holdings. That’s the engine that allows it to keep buying its buy-bitcoin-get-higher-share-price-use-that-to-buy-more strategy moving. From where I sit, it looks very inefficient to use the market term.
As a closing note, if you want to make a point on Twitter or BlueSky or wherever else, make a point. Telling me to reread the fucking 8-Ks is less effective than you might think.