Strategy: Debt Is Now Unsustainable (Rating Downgrade)

Summary

• I am downgrading Strategy from buy to a hold due to concerns about its increasingly leveraged balance sheet and new preferred stock issuances.
• Recent preferred stock offerings introduce significant cashflow risks, as their high yields could become unsustainable without sufficient revenue or Bitcoin price appreciation.
• Valuation now appears fair after a strong run-up, and future upside is limited unless Bitcoin substantially outperforms the high cost of capital from preferred shares.
• While the 21/21 plan is ambitious, regulatory and tax risks, plus the burden of perpetual preferred dividends, make the risk/reward less attractive for common shareholders.

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Co-Authored by Noah Cox and Brock Heilig

Investment Thesis

Shares of Strategy (formerly MicroStrategy) (MSTR) are currently outperforming the market by a strong margin. Year to date, Strategy shares are up more than 31%. Over the

Analyst’s Disclosure:I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Noah Cox (main account author) is the managing partner of Noah’s Arc Capital Management. His views in this article are not necessarily reflective of the firms. Nothing contained in this note is intended as investment advice. It is solely for informational purposes. Invest at your own risk.