The SuperMicro MicroStrategy: Winland Holdings $WELX

The Best Crypto Trade or Nah?

I am the guest speaker at the Crypto Club at my former university on Monday night, so I have been diving into crypto recently, but this will be my last writeup on crypto for a long while.  Partially because I am out of my competency, and partially because nothing in crypto is undervalued enough for a value degen.  Just because they aren’t cheap doesn’t mean I think they don’t have good odds of rocketing upwards, but momentum and growth don’t come naturally to me.

While listening to Murray Stahl’s earnings calls to research FRMO, he mentioned as an aside the history of Winland Holdings (WELX), a company that FRMO owns 39% of.  A couple of young activist investors found the climate sensor manufacturing company incredibly undervalued, and bought it out.  These temperature, humidity, and moisture sensors are such a niche market, there is very little competition, and it generates cash which the entrepreneurs have been seeking ways to reinvest profitably for the last ten years or so.  In 2021, Winland settled on cryptocurrency mining as their place to reinvest those sensor profits.  With no debt, assets have grown at a 21% compound rate between 2020 and 2023, which does not include the recent rebound in crypto prices.

Murray Stahl is advising Winland on their crypto strategy, with the ultimate goal being that the amount of bitcoin and other alt coins owned per share of Winland increases over time.  In order to finance this accumulation of Bitcoin, Winland mines cryptocurrencies and sells enough to cover the costs, while stockpiling the remainder. This is not the typical strategy of a crypto miner which sells all product in order to buy more mining rigs which depreciate rapidly into the next crypto downturn.

Currently Winland has a few hundred mining rigs operating, mostly focusing on merge-mining combined Doge and Litecoin.  The strategy has been to sell the Doge coin to finance the costs of mining, and to keep as much of the rest as possible.  This strategy began in 2021 when Winland accumulated 27 Bitcoin.  As of September 2024, Winland is up to 77 Bitcoin, and while there has been some share issuance to FRMO in exchange for mining rigs, the fundamental strategy of increasing Bitcoins per share has been working.

At today’s Bitcoin price, those 77 Bitcoin would sell for over $7 million out of Winland’s $25 million market capitalization.  So Winland is trading at a somewhat similar multiple of their Bitcoin holdings as MicroStrategy (MSTR), but with the differences that MicroStrategy has debt, and has a core business that loses money.  Winland has no debt, and the core sensor business makes money.  Since 2021, MicroStrategy’s Bitcoin per share has increased by about 8%.  Since 2021, Winland’s Bitcoin per share has increased by about 230%.  Murray Stahl’s strategy seems to be superior to Michael Saylor’s if that is the metric by which to measure success.

If I deduct the value of the sensor business from the market capitalization to get a better apples to apples comparison with MicroStrategy, I would value the sensor business very conservatively at about 5x EBITDA.  Based on 2023 EBITDA, that would value the sensor business at about $10 million.  Valuing the crypto mining business at zero, that would mean that the remaining component of Winland is selling for about 2x the asset value of the crypto, instead of MicroStrategy’s 2.7x asset value. That’s probably as close to a value investment in crypto as I could find in a world where the president-elect has promised to create a national strategic bitcoin reserve.

Investing in Winland is not for the faint of heart, it is an over-the-counter (OTC) or pink sheet microcap.  This means that they do not submit filings to the SEC, and the security is very thinly traded.  I typically try to avoid microcaps, although recently I have gone down market from my original guidelines of companies between $500 million and $3 billion in market capitalization.  But even the fallen angels that have small market capitalizations often have over a billion dollars in annual revenue, as opposed to Winland who sells about $3 million to $5 million in sensors per year. 

The primary reason that I avoid microcaps is that they are typically a “wretched hive of scum and villainy,” to quote a classic film of my childhood.  But in this instance, Murray Stahl speaks very highly of the character of the management team of Winland, which takes away my biggest reservation about microcaps.  There is still the illiquidity, the large bid ask spread, and the less detailed financial filings, but those seem minor when compared to the perennial problem in finance: abusive management. 

Another potential risk of investing in Winland is that it is 40% owned by one of the directors, 39% owned by FRMO, and 13% owned by the CEO, so the public float is very small.  This means that it would not surprise me if it were to eventually be reorganized or merged with other aspects of the Horizon Kinetics crypto strategy.  But with such a large ownership stake by management, that kind of acquisition would need to be at a decent price, and possibly paid for in FRMO shares instead of cash.  

The primary reason to buy Winland, if that is what you are inclined to do, is if you want to have that small allocation to crypto, 1% of the portfolio or so, but you want a more pure way to do that as opposed to buying FRMO which is about 65% Texas Pacific Land Holdings.  To get a 1% exposure to cryptocurrencies, would it be better to have a 1% allocation to Winland, or a 10% allocation to FRMO?  I love FRMO, but it is not the cleanest way to implement a cryptocurrency strategy.