Summary Upexi, Inc. shares have dropped significantly since May, now trading at a discount to their Solana holdings' basic mNAV. UPXI's value is heavily tied to its 2 million SOL holdings and staking yields, but dilution risk from 48 million registered shares limits upside. Legacy consumer product business continues to decline, raising concerns that future operations may require selling SOL or using staking rewards for expenses. I cautiously upgrade UPXI to 'hold,' as a potential mNAV re-rating could occur if SOL surges, but dilution and operational risks remain. Back in May, I initiated coverage of Upexi, Inc ( UPXI ) and called the stock a 'sell' due to its inflated valuation relative to the combo of its legacy business and its Solana ( SOL-USD ) themed DAT strategy. Since that 'sell' call, UPXI shares have fallen by as much as 70%. Currently, UPXI shares are just 40% off that mid-May sell call: Data by YCharts Given the fact that SOL is actually up 5% over that same stretch, I think it would be fair to call UPXI's performance as a SOL-proxy considerably poor over these last 5 months. As I said at the end of that May piece, good assets can be purchased at a bad price. And even though Upexi paid a great price for its SOL earlier this year, $10 for UPXI in May was a bad deal. At a price currently under $6, prospects look a lot better. Solana Strategy and mNAV Just as (Micro)Strategy ( MSTR ) had been able to do for the last several years, Upexi quickly scaled up its Solana holdings through various financial instruments like common stock and convertible note issuance. According to data tracked by Blockworks Research, Solana DATs hold roughly 15.8 million SOL combined. Solana DAT Supply (Blockworks) Of that combined SOL position through DAT companies, Upexi holds a little over 2 million SOL and is the fourth largest Solana-themed DAT in the market. The table below breaks down the value of Upexi's Solana relative to its current market capitalization and its post-share registration diluted market capitalization: mNAV Calculation Prior To Offering Offering Completion Shares 58,888,756 94,457,980 UPXI Price $5.61 $5.61 Solana 2,018,419 2,018,419 Solana Price $185 $185 Solana Value Per Share $6.34 $3.95 mNAV 0.88 1.42 Source: Upexi, Analyst's Calculation, $185 SOL price at article submission Utilizing a basic calculation alone, UPXI arguably looks cheap relative to its SOL holdings based on a $5.61 closing price and a $185 SOL price on October 16th. Things get a bit more murky due to the recent offering registration that could see as many as 48 million shares sold from buyers of Upexi's PIPE and convertible note. The problem for UPXI shareholders is the proceeds from the offered shares go to the selling stockholders rather than the company. Thus, this would be expansion of the float that wouldn't lead to SOL purchases for UPXI shareholders. Not included in that offering is roughly 5 million in additional shares through options, warrants, and other instruments: Excluded From Share Count UPXI Shares Options ($3.39 ex) 621,353 Warrants ($4.20 ex) 1,848,735 Debt Converts 186,667 Preferred Converts 138,889 RSU from Incentive Plan 2,250,000 Total 5,045,644 Source: Upexi Given those shares, we can calculate a fully diluted mNAV for UPXI at closer to 1.5. The justification for a fully diluted mNAV premium this large is debatable, in my view. The company has the ability to raise capital through its $500 million equity line. Raising capital in this way makes sense in a world where mNAV premium is extended. But I suspect as long as the stock trades at a discount to basic mNAV, diluting existing shareholders through that $500 million equity line is less likely. Especially considering such a large cohort of shareholders have registered their shares for sale, including CEO Allan Marshall - though he would retain the majority of his equity. As I see it, Upexi's immediate path to acquiring more SOL is likely limited to its staking strategy. Solana Staking Yield vs Staked SOL (StakingRewards) In Upexi's last earnings report, the company noted an 8% annualized yield from staking SOL. This yield has come down quite a bit since the end of Upexi's last reported quarter. Investors can think of the relation between staked assets and staking yields similarly to the way they would bonds or dividends; the more demand there is for yield, the lower the yield goes. Upexi's Staked SOL 2,018,419 Annual Yield as of 10/16 6.5% Annualized Return at $185 $24,271,488 Source: Analyst's calculations The good news is even at the current annualized SOL staking yield of 6.5%, 2 million staked SOL at a value of $185 per coin generates over $24 million in staking rewards. This would actually flip Upexi to a profitable company, all else being equal. Legacy Business It's important to remember that even though the company's equity valuation is now largely tied to the daily performance of Solana, Upexi continues to operate its legacy consumer product business. Even with roughly $1 million in digital asset revenue during the year ended June, Upexi still saw top line revenue decline year over year by 43% and lost $13.7 million during the fiscal year: 10-k (Upexi) $9.8 million of Upexi's $11.2 million decline in revenue year over year was due to its divesting of its re-commerce business. Still, this implies that even adjusting for the re-commerce portion, Upexi's owned-brand consumer product business looks to have contributed roughly $1.4 million to that year over year revenue decline. The point is, if Upexi continues to operate its consumer business, it could come at the expense of SOL holdings in the future either through liquidated staking rewards or capital raised through equity offerings going toward opex. Closing Thoughts As I see it, the potential headwind of 48 million shares coming into the float without leading to direct SOL purchases limits the upside of the stock. At a basic mNAV discount, Upexi theoretically has an incentive to sell Solana and buy back common shares if doing so could generate greater returns than the staking yield from the SOL. But I largely view such a strategy as unlikely. My expectation is UPXI will perform in correlation with SOL for the foreseeable future, but may continue to lag the underlying in the event large quantities of the registered shares are sold. I'll cautiously upgrade UPXI to a 'hold' due to the possibility that basic mNAV could re-rate from a discount to a premium in the event SOL surges in price. But I still don't personally have any interest in buying shares of UPXI at this point in time.
