Strategy: Hate Or Love Bitcoin, Preferreds Are Still Getting A High Yield

Summary Strategy’s fixed-income securities offer investors an income-based way to gain exposure to Bitcoin. STRK and STRF have substantially different clauses that align them with different types of investors. Both preferreds are currently swapping hands at small premiums to their $100 per share liquidation value. STRK’s convertible feature exposes its holders to more MSTR volatility versus STRF. MicroStrategy ( MSTR ), renamed Strategy, has two outstanding preferreds that offer income investors dividend yields that seemingly more than compensate for the risk posed by the $102 billion market cap Bitcoin (“BTC”) holding company. MicroStrategy 8.00% Series A Perpetual Strike Preferred Stock ( STRK ) and MicroStrategy 10.00% Series A Perpetual Strike Preferred Stock ( STRF ) both offer alternative investment methods versus the commons as MSTR continues its aggressive BTC accumulation strategy, built on near-weekly buys of the cryptocurrency. This is backed by a sustained, material, and Sisyphean capital-raising effort from a perpetual at-the-market common stock offering program, padded by the sale of preferreds and the issue of convertible debt. MSTR most recently bought 4,020 BTC and now holds 580,250 BTC as of the 26th of May. This would mean a roughly $63.4 billion value on its holdings, with BTC currently trading for $109,301 and with an average purchase price of $69,979 . Strategy Fiscal 2025 First Quarter Form 10-Q These preferreds are relatively young. STRK started trading in January, with STRF going public two months later. Critically, both securities offer an income-based way to gain exposure to BTC. MSTR filed to sell up to $21 billion of its common shares in May; these stock sales are being completed, with the common shares trading at a significant premium to the underlying value of the company’s BTC holdings. These equity sales form the primary way the company meets its coupon payments to the preferred holders. Data by YCharts The premium essentially provides MSTR with a blank check to continue to acquire BTC at a level that’s incredibly accretive to its balance sheet. However, this position is only maintained in a BTC bull market, as the company does not generate sufficient cash flows from its enterprise analytics software platform to buy BTC. This platform is MSTR’s only reportable operating segment, generating fiscal 2025 first-quarter revenue of $111.06 million . This underperformed consensus estimates and also dipped 3.6% over the year-ago period. The software business is immaterial to the bull case, generating a negative operating cash flow of $2.4 million during the first quarter. Data by YCharts The Risk And Opportunity Of The Preferreds Data by YCharts While MSTR can be seen as a proxy for owning BTC directly, the strong premium to BTC means it has built a large short interest, with roughly 11% of its common shares outstanding sold short. The company is a levered play on BTC; hence, the commons tend to outperform in BTC bull markets. MSTR’s commons are up 120% over the last 1-year, versus a BTC performance of 57%. The inverse is true, with MSTR underperforming BTC during BTC bear markets. MSTR’s full fiscal year 2025 guidance for its BTC yield, the percentage change in Bitcoin per share, was raised to 25% from an initial 15% floor, with the company also aiming to now gain $15 billion in BTC. Security Current Price To Liquidation Value ($100) Annual Coupon And Yield MicroStrategy 8.00% Series A Cumulative Perpetual Strike Preferred Stock ( STRK ) $100.99 (+0.99%) $8 (7.92%) MicroStrategy 10.00% Series A Cumulative Perpetual Strike Preferred Stock ( STRF ) $100.15 (+0.15%) $10 (9.98%) Both preferreds have a $100 per share liquidation value, with STRF offering a yield on cost that at 9.98% is around 206 basis points above STRK. STRF also trades on a slightly smaller premium to its liquidation value of 0.15% versus a premium of nearly 1% for STRK. The core difference between these perpetual preferreds with no call date is that STRK has a convertible feature. Holders of STRK have the right to convert their shares on any business day into common shares. This is at an initial conversion rate of 0.10 shares of the common stock per share of STRK. MicroStrategy 8.00% Series A Perpetual Strike Preferred IPO Prospectus This essentially creates direct exposure to MSTR’s volatility as it provides an embedded call option. STRK would have an embedded value of $54.30 per preferred share if MSTR, currently trading for $370 per share, were to trade up back to its 52-week high of $543 per share. Hence, investors are willing to accept a marginally higher premium and a lower yield to gain access to the MSTR call option. It also means STRK will be significantly more volatile with the preferreds up 24.68% year-to-date, nearly matching the commons, versus a performance of 10.97% of STRF. Seeking Alpha This has opened up a dichotomy for the securities where STRF will likely outperform STRK in an event where BTC and MSTR are dipping lower and investors would prefer the stability it provides. The inverse is true with STRK set to continue to outperform in bull markets. MSTR issues a bunch of extremely cheap convertible debt. This totalled $8.14 billion as of the end of its first quarter, up sequentially from $7.1 billion as of the end of December. The company is paying just $14.68 million in quarterly interest for this debt balance, with the prior junk ” B- ” credit rating from S&P Global withdrawn as of December. Cbonds Strategy Fiscal 2025 First Quarter Form 10-Q Prospective investors in either preferreds should be aware that MSTR is simply unable to fund its interest payments without selling more shares of its common stock or more preferreds. This opens up a worst-case scenario where a collapsing BTC and common share price inhibits the company’s ability to execute its BTC buying program, which could spark a suspension of coupon payments to shareholders or payment in common shares in lieu of cash for STRK. The company can only pay in cash coupons to STRF holders. Both preferreds are cumulative, but STRF has a unique escalating clause that any unpaid dividend will itself accrue dividends by an extra 100 basis points each subsequent quarter of missed payments up to a ceiling of 18% per year. This ramps up their inherent stability versus STRK. I would not initiate a position in either due to the current premium to liquidation value with a possible pullback in BTC, currently trading at highs, ramping up near-term risk. All MSTR securities are being rated as a hold.

Source: Seeking Alpha