Summary MicroStrategy's rebranding to "Strategy" underscores its commitment to Bitcoin, with a significant BTC stash and innovative financing mechanisms like STRK preferred stock. MSTR maintains a strong statistical correlation to BTC, and the correlation coefficient tends to be stronger as Bitcoin's bullishness increases. Despite potential Bitcoin bear market risks, MSTR's substantial BTC holdings and strategic financial maneuvers mitigate concerns, differentiating it from high-risk entities like FTX. The company's future profitability is tied to Bitcoin's performance, with upcoming accounting changes and debt redemption expected to improve financial metrics and balance sheet health. Bitcoin's ( BTC-USD ) popularity and adoption are ever on the rise, and more publicly traded companies are beginning to explore how to leverage BTC as a strategic asset on their balance sheets. In the past year, more ways to gain Bitcoin exposure have been available to equity investors: the spot Bitcoin ETFs and exposure through companies adopting a Bitcoin reserve strategy have been the two most popular ways retail investors have been gaining Bitcoin exposure through the stock market. (Micro)Strategy ( MSTR ) has made the latter method of Bitcoin exposure become prominent these past few years, being the first mover as a major U.S. company to adopt a Bitcoin treasury strategy. It's almost impossible to talk about Bitcoin-exposed stock or the adoption of Bitcoin treasury strategy without mentioning MSTR. MSTR’s creative CEO Michael Saylor’s faith in Bitcoin and its potential value appreciation has boded well so far in terms of stock gains, thanks to the timing of their first $250 million in Bitcoin purchases in 2020, when Bitcoin price was around $11,000. MSTR now averages $65,000 for its total BTC stash of around 478k BTC. Let's move beyond the basics (before I bore more experienced Bitcoin investors with details they already know) and dive into the latest evolution at MicroStrategy, or rather, Strategy as the company is now rebranded – it might take some time before the new brand name sticks. It's been the talk of the week that MicroStrategy has taken on a new Bitcoin-centric brand, unveiled just before the Q4 earnings. I’d say holding a stash of 478k BTC worth over $40 billion and taking on a brand name/design that is all about Bitcoin isn't just cosmetic – I believe it is Saylor’s bold message that he is fully doubling down on Bitcoin. It could also be a way to alienate the brand from its underperforming software business and make it come off as fully Bitcoin-centric. While we’re not here to decipher CEOs' motives, we can gauge their strategic decisions and how they influence market expectations, so we as investors could make material decisions based on the potential outcomes. strategy.com Saylor has been creative with his strategies in marketing and financing. The latest financial strategy is MSTR’s preferred stock Strike ( STRK ) – which comes with a perpetual call option and an attractive 8% dividend yield. Now, he's also gotten fully creative with marketing by leveraging bold branding. The branding might come off as mere theatrics to the traditional investor; crypto investors know that branding has a psychological influence on the investors or “following” who ultimately end up forming an affinity to crypto-focused brands. Ever heard of Bitcoin Maxis or the XRP ( XRP-USD ) army? That sort of trend. STRK is worth talking about in a fleeting overview here. The preferred stock has some material impact on Strategy’s operations and BTC acquisition moving forward, and also impacts MSTR investors as well. In light of the company’s Bitcoin-focused operations, MSTR investment prospect boils down to two strong factors: firstly, how much cost-effective leverage Strategy gets in funding Bitcoin purchases as well as the timing of the purchases (readily accessible leverage helps with timing), and the second factor is Bitcoin price trajectory. Factor two is mostly out of Strategy's control and remains a major systematic risk for MSTR. The first factor is where Saylor's creative capital raises shines. STRK has added more flexibility to the first aforementioned factor for MSTR by offering Strategy a diversified financing mechanism that is attractive for investors and predictable for Strategy. STRK’s 8% dividend yield is a good incentive for investors to hold STRK, and it means Strategy will know how (and will plan accordingly) to disburse the yield and in what form to pay the yield, fully at Strategy's discretion. More financial control and smoother operations from these fixed-income securities, if you ask me. Strategy Q4 presentation Before we get too hyped about STRK and its prospects, one question comes to mind: Is the yield sustainable and maintainable in a Bitcoin bear market? The short answer is: YES. Strategy has enough BTC to service STRK dividend yield for the long term. Even when market conditions are unfavorable, the dividend payments could be deferred for a while till conditions become favorable. A hypothetical bearish scenario is that the price of BTC falls drastically to, say, $15,000 (about an 85% decline), from the current $97,000 levels. Considering Strategy will be paying around $58.4 million at currently issued 7,300,000 STRK preferred stock, except the price of BTC drops to around $15,000 and below for Strategy's current 478k BTC stash to be worth under $7 billion, dividend payments and debt obligations should still be manageable for Strategy. Even in such a scenario, the company still has a few options left, including liquidating some Bitcoin holdings. I think it's important to mention the above bear market scenario because I've seen, especially on social media, an exaggerated view of MSTR’s risk in a Bitcoin bear market. Some even go as far as comparing MSTR’s strategy to the next FTX-like collapse. While investing in a Bitcoin-backed stock like MSTR does carry risk, it doesn’t come anywhere near the systemic risk we saw with the likes of FTX. It's important to differentiate between risk exposure and outright financial fiasco when considering investments in Bitcoin-centric companies. Strategy Q4 presentation I believe that debt won’t likely be much of a burden too for Strategy in the near term as only around $3 billion of convertible securities are currently out of the money, others are in the money. $1.05 billion of convertible notes will be fully redeemed later this month, also reducing balance sheet leverage. Strategy Q4 presentation I also think dilution will be minimal moving forward (at least for the 2025 fiscal year). Strategy has reached 80% of equities issued in its 21/21 capital raising plan, and I think Saylor will issue the remaining 20% of their target more sparingly. Though there is still $17.4 billion yet to be raised from fixed income securities in the 21/21 plan, there will be minimal dilutive effect from most of the securities in the near term as the dilutive effect of the convertible fixed income securities is deferred until conversion. It is worth mentioning that the 21/21 plan isn't an immutable commitment, in my opinion. Of course, Saylor might adopt a new capital raise strategy. Or, he might see new BTC buying opportunities if Bitcoin takes a huge dip, which could prompt fresh and quick ATM offerings beyond the 21/21 plan. It's all at Strategy's discretion. Therefore, there is always the risk of ongoing high dilution for MSTR investors. Strategy Q4 presentation This brings me to one of the main KPI metrics introduced by Strategy which the company prominently showcases in its presentations – the Bitcoin Yield – which measures the % change, during a period, of the ratio between a company’s Bitcoin Holdings and its Assumed Diluted Shares Outstanding. This is simply the change in BTC/share over a certain period but adjusted for the potential impact of convertible securities and other assumed dilutive instruments. My faith in this KPI metric is limited. When investors focus mainly on the BTC yield as a key metric, it could mask other questionable fundamental risks. If BTC yield increases over a certain period, but the company uses some non-convertible debt to buy Bitcoin, BTC/share may increase, but financial risk also increases. Timing of equity offerings could also influence the assumed diluted shares' outstanding figure, creating a temporary BTC/share boost which could appear as though accumulation is outpacing dilution. In my view, this is not a definitive metric to be heavily relied on by investors. Looking Ahead Now that Strategy has rebranded, signaling that it is now potentially headed towards becoming a pure-play BTC company, we can give some typical financial metrics less weight. Q4 results were not encouraging in reality. But MSTR is a unique and interesting business where investors have to turn a blind eye to most of the regular financial numbers. Earnings loss deepened in Q4 at $(3.20) adjusted EPS. There is no easy path to profitability for Strategy if we consider the typical fundamental metrics. Even with the high BTC stash and profitable average BTC purchase price, the difference between the current BTC spot price and Strategy's dollar cost average BTC price remains unrealized gains and doesn't influence the bottom line yet (until sold and capital gain becomes realized). Saylor has reiterated that there will be no BTC sales anytime soon, which would have been a quick fix for earnings at least. From the look of it, Saylor isn't worried about earnings numbers because he knows MSTR investors are not valuing it as a traditional company. Improvements expected in financial numbers moving forward will be the accounting improvement to the balance sheet when the FASB accounting rule is adopted in Q1 FY25 (mentioned in the earnings conference call ). Also, I expect the redemption of $1.05 billion callable notes later this month to deleverage the balance sheet and revamp the balance sheet in Q1. And, adoption of FASB accounting means there will be no impairment charges due to BTC write-downs – the main factor that drove up Q4 OpEx and influenced Q4 earning loss. This will potentially “unburden” OpEx and the bottom line. Previous MSTR coverage (Seeking Alpha) I've been long MSTR for over a year and still hold my position. It's been nearly a year since I last covered MSTR here on Seeking Alpha. The stock is up 219% since then. And I still see more upside potential because of ever-increasing Bitcoin adoption. MSTR has maintained a strong correlation coefficient with Bitcoin. The correlation coefficient is one of my favorite technical indicators to gauge MSTR price correlation to BTC. The current BTC-MSTR correlation coefficient is 0.77. Meaning, at the given time, 77% of MSTR's price movement can be statistically explained by Bitcoin’s movement. BTC - MSTR correlation coefficient (TradingView) As long as Strategy keeps strategically acquiring BTC, I think the market will keep valuing its holdings high, it will maintain a strong BTC correlation, and it will keep trading at a premium to NAV. When Bitcoin bullishness increases, MSTR correlation coefficient increases too – showing that investors see MSTR as a strong BTC proxy. Notice from the preceding chart, around President Trump’s inauguration when bullishness surrounding Bitcoin heightened as crypto investors anticipated a series of executive orders in favor of Bitcoin and some announcements related to the U.S. government strategic Bitcoin reserve, making Bitcoin hit $109k all-time high , MSTR’s correlation coefficient with BTC also heightened and went as high as 0.98 on January 22 nearly forming a perfect positive correlation with BTC. In a Bitcoin bull market, MSTR tends to move in lockstep with BTC. Strategy is a company that is in it for the very long haul, in my view. Owning and controlling over 2% of the total Bitcoin supply is a big deal, in my view. Even if additional purchases cease to be accretive in dollar terms and Bitcoin reaches a price ceiling, there is still more Strategy could do with its Bitcoin stash to generate yield, since a majority of Strategy’s debt is unsecured (at the moment) and most of its BTC are not tied up in loans. I think one key factor investors should watch out for will be how much of Strategy's Bitcoins remain unencumbered. Finance will keep on evolving, and I believe Bitcoin will maintain relevance in modern finance. Strategy is an early-mover, controls a significant supply of Bitcoin, and has a CEO who is a strategist. I'm long MSTR. I let Saylor take on the leverage risk, while I take on the market and volatility risk.
