This week, Semler Scientific (SMLR) announced a new Bitcoin Treasury strategy. The market responded…. very favorably to the news, with SMLR way outperforming the market and Bitcoin:
Saylor recounted the following recently on the What Bitcoin Did podcast (paraphrasing from memory):
"It was 2020, and we noticed every mainstreet business was getting wrecked and every Wall St. business was thriving. So we thought we needed to get in the business of being a Wall St business, meaning we provided something that Wall St desired. We had an operating business that was profitable but wasn't able to grow. Revenue flat every year, retained earnings up every year, half the enterprise was in cash. And we're earning 0% on that cash while the Fed just created 40% more money. So our effective cost of capital is 40% and we needed to find an asset to invest in that would exceed our cost of capital or else we were going to die. So we considered what to do with the cash. We could return it to shareholders as dividends or buybacks, but that would just be hastening our death as a company. We could sit on it and continue to pay employees and management and continue as a going concern for a long time, but that is just waiting to die. And then you start to lose talent, because nobody wants your stock options as compensation because there is no volatility in the stock. But you can't overpay them in cash either, because then you stop making money.
So it was either a) return the cash to shareholders and die fast b) hold onto it and die slow or c) invest it an asset that would exceed our 40% cost of capital, make our stock desirable to Wall St. and employees and attract talent. Public companies have restrictions against investing the balance sheet in securities, so we considered gold. And when we considered gold, we realized bitcoin was better. It was digital gold with a technology network effect. So it became clear that bitcoin was really the only option, or else we might as well sell the company."
So the takeaway for me was it was an intentional choice to provide Wall St. with the securities it wanted in both the stock and the converts. You add volatility to the stock, you can opportunistically sell stock and add bitcoin to the balance sheet accretively.
Something that ETFs don't have yet are listed options. The listed options on MSTR are valuable as hedging tools for bitcoin investors. The convertible bonds are the best performing bond in any bond investors' portfolio. So MSTR is still giving Wall St. something it wants that it can't get anywhere else.
As far as SMLR goes, it seems to me they were faced with a similar situation. Before the stock pop, they had a market cap of $164mm with $63mm cash. So, 38% of the enterprise is in cash making 5%. M2 money supply has been growing ~7.5% a year for just about any time period beyond 5 years you want to measure, so without organic investment opportunities to grow the business (assumption! idk about their business), SMLR, like MSTR, is just waiting to die. They can't earn enough to exceed their cost of capital.
Through this lens, I actually read the adoption of a bitcoin strategy as BEARISH for the prospects of the operating business, because it PROBABLY tells me management doesn't think they can earn 8%+ ROIs investing in the business (even though they've historically grown revenue quite nicely and profitably? - I know nothing about their future business prospects). It MIGHT tell me that management doesn't think it can earn more investing in the biz than they think they can earn sitting on bitcoin, which is equivalent to them adopting a "bitcoin standard" -- i.e. measuring all potential uses of capital against their expected return of just holding bitcoin.
But, in investing in bitcoin, they've just breathed life into the company. Now, the stock has volatility and is garnering investor attention. Employees might be excited/motivated. Talent might find it attractive to go work there and effectively get paid in bitcoin. Adopting a bitcoin strategy I think creates optionality and life for an otherwise sleepy operating business waiting to die or be sold.
I agree with you we are going to see a lot more of this. There are a litany of zombie companies out there that can and probably should either sell themselves, liquidate or run the bitcoin playbook. As Saylor says in that same podcast, the beginning of the corporate bitcoin adoption era is marked with the a) approval of the ETFs and b) change in accounting rules in January 2024. Those two things paved the way for corproate adoption. His words, again paraphrasing: "we are in 1994 with the adoption of the internet, and people are asking well why don't more companies have websites? Well, give it a few years, they'll all have websites."
Is this good? I think so. The first order effect for these business I think is the discontinuation of malinvestment. Malinvestment = running a business earning 5% when your cost of capital is 7.5% so you can keep paying management team salaries. This probably describes a wide swath of the Russell 2000. With bitcoin now existing as an alternative, a lot of these business will probably be starved of capital unless they adopt bitcoin themselves.
I think Semler might be a bit unique as well because they are a microcap (approximately $200MM market cap) which means that their shareholder base should be uniquely concentrated with retail investors.
They also benefit by being "cheap" on a trailing earnings basis, with great trailing fundamentals (lots of growth, high margins, etc.) unlike MSTR. Investors who have been following Semler for longer would be more aware of the massive risks around charge codes, PAD standard of care, etc. and know why it trades at a "low" trailing multiple, but new crypto focused investors probably aren't aware of those risks.
So a lack of institutional investors and a sudden influx of new retail investors into a "cheap" trailing multiple with good trailing fundamentals could be uniquely positioned for a pop on crypto news.
Guilty as charged as someone new to semler but here for the bitcoin strategy. What’s your outlook on the potential risks to what has recently been heady free cash flow?
With the $150m debt issuance the firm is about to become leveraged to BTC and the market tends to price this in as a premium in advance. It’s an amazing cheat code for companies adopting the bitcoin standard and following Saylor in the leverage strategy.
Game plan it out. Semler is about to raise $150 debt and then stack a total of $210M in BTC. Plus you’re getting the cash flowing business nearly for free after pricing in a modest pump in the BTC post halving bull market cycle.
I agree that on the face of it, it makes no sense that anyone sane would now buy SMLR or MSTR over IBIT, etc. But I think the big factor you might be missing is that none of the BTC ETFs are legally available to European investors but buying SMLR or MSTR is cheap and easy with just about any brokerage account.
Saylor recounted the following recently on the What Bitcoin Did podcast (paraphrasing from memory):
"It was 2020, and we noticed every mainstreet business was getting wrecked and every Wall St. business was thriving. So we thought we needed to get in the business of being a Wall St business, meaning we provided something that Wall St desired. We had an operating business that was profitable but wasn't able to grow. Revenue flat every year, retained earnings up every year, half the enterprise was in cash. And we're earning 0% on that cash while the Fed just created 40% more money. So our effective cost of capital is 40% and we needed to find an asset to invest in that would exceed our cost of capital or else we were going to die. So we considered what to do with the cash. We could return it to shareholders as dividends or buybacks, but that would just be hastening our death as a company. We could sit on it and continue to pay employees and management and continue as a going concern for a long time, but that is just waiting to die. And then you start to lose talent, because nobody wants your stock options as compensation because there is no volatility in the stock. But you can't overpay them in cash either, because then you stop making money.
So it was either a) return the cash to shareholders and die fast b) hold onto it and die slow or c) invest it an asset that would exceed our 40% cost of capital, make our stock desirable to Wall St. and employees and attract talent. Public companies have restrictions against investing the balance sheet in securities, so we considered gold. And when we considered gold, we realized bitcoin was better. It was digital gold with a technology network effect. So it became clear that bitcoin was really the only option, or else we might as well sell the company."
So the takeaway for me was it was an intentional choice to provide Wall St. with the securities it wanted in both the stock and the converts. You add volatility to the stock, you can opportunistically sell stock and add bitcoin to the balance sheet accretively.
Something that ETFs don't have yet are listed options. The listed options on MSTR are valuable as hedging tools for bitcoin investors. The convertible bonds are the best performing bond in any bond investors' portfolio. So MSTR is still giving Wall St. something it wants that it can't get anywhere else.
As far as SMLR goes, it seems to me they were faced with a similar situation. Before the stock pop, they had a market cap of $164mm with $63mm cash. So, 38% of the enterprise is in cash making 5%. M2 money supply has been growing ~7.5% a year for just about any time period beyond 5 years you want to measure, so without organic investment opportunities to grow the business (assumption! idk about their business), SMLR, like MSTR, is just waiting to die. They can't earn enough to exceed their cost of capital.
Through this lens, I actually read the adoption of a bitcoin strategy as BEARISH for the prospects of the operating business, because it PROBABLY tells me management doesn't think they can earn 8%+ ROIs investing in the business (even though they've historically grown revenue quite nicely and profitably? - I know nothing about their future business prospects). It MIGHT tell me that management doesn't think it can earn more investing in the biz than they think they can earn sitting on bitcoin, which is equivalent to them adopting a "bitcoin standard" -- i.e. measuring all potential uses of capital against their expected return of just holding bitcoin.
But, in investing in bitcoin, they've just breathed life into the company. Now, the stock has volatility and is garnering investor attention. Employees might be excited/motivated. Talent might find it attractive to go work there and effectively get paid in bitcoin. Adopting a bitcoin strategy I think creates optionality and life for an otherwise sleepy operating business waiting to die or be sold.
I agree with you we are going to see a lot more of this. There are a litany of zombie companies out there that can and probably should either sell themselves, liquidate or run the bitcoin playbook. As Saylor says in that same podcast, the beginning of the corporate bitcoin adoption era is marked with the a) approval of the ETFs and b) change in accounting rules in January 2024. Those two things paved the way for corproate adoption. His words, again paraphrasing: "we are in 1994 with the adoption of the internet, and people are asking well why don't more companies have websites? Well, give it a few years, they'll all have websites."
Is this good? I think so. The first order effect for these business I think is the discontinuation of malinvestment. Malinvestment = running a business earning 5% when your cost of capital is 7.5% so you can keep paying management team salaries. This probably describes a wide swath of the Russell 2000. With bitcoin now existing as an alternative, a lot of these business will probably be starved of capital unless they adopt bitcoin themselves.
I think Semler might be a bit unique as well because they are a microcap (approximately $200MM market cap) which means that their shareholder base should be uniquely concentrated with retail investors.
They also benefit by being "cheap" on a trailing earnings basis, with great trailing fundamentals (lots of growth, high margins, etc.) unlike MSTR. Investors who have been following Semler for longer would be more aware of the massive risks around charge codes, PAD standard of care, etc. and know why it trades at a "low" trailing multiple, but new crypto focused investors probably aren't aware of those risks.
So a lack of institutional investors and a sudden influx of new retail investors into a "cheap" trailing multiple with good trailing fundamentals could be uniquely positioned for a pop on crypto news.
that is a really interesting point / thesis
Guilty as charged as someone new to semler but here for the bitcoin strategy. What’s your outlook on the potential risks to what has recently been heady free cash flow?
With the $150m debt issuance the firm is about to become leveraged to BTC and the market tends to price this in as a premium in advance. It’s an amazing cheat code for companies adopting the bitcoin standard and following Saylor in the leverage strategy.
Game plan it out. Semler is about to raise $150 debt and then stack a total of $210M in BTC. Plus you’re getting the cash flowing business nearly for free after pricing in a modest pump in the BTC post halving bull market cycle.
If BTC doubles, this becomes $420m worth of BTC.
I agree that on the face of it, it makes no sense that anyone sane would now buy SMLR or MSTR over IBIT, etc. But I think the big factor you might be missing is that none of the BTC ETFs are legally available to European investors but buying SMLR or MSTR is cheap and easy with just about any brokerage account.