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. 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 last 6 months, the stock has fallen by more than 3%. And in the last year, shares have increased by a strong 136.81%. Because of this quick rise in share price (driven by the rise in Bitcoin), I am actually downgrading my view of shares of Strategy from a buy to a hold. While Strategy’s plan to accumulate more Bitcoin could still turn out to be a solid one, I am concerned by the series of preferred stock the company has added to their capital stack. None of this was on their capital stack when I first wrote on the company back in January. My fear now is that their growth of debt could exceed the growth of their Bitcoin equity. The company’s stock has grown by more than 20% since the last time I wrote on them in mid-January, and I was very impressed by Q1 execution. However, I think shares are now fairly valued. I don’t see a ton of upside from here. This aligns well with my upside prediction from my writing back in January. Strategy adding preferred stock to their balance sheet may not end up being sustainable. I think this will be a tough pill for current common shareholders to swallow. Shares of Strategy are downgraded to a hold. Why I’m Doing Follow-Up Coverage As I mentioned earlier, Strategy stock has rallied about 26% since I last wrote on the company in early January. Over just 5 months, Strategy shares have risen from about $310 to roughly $391 a piece. In this same time frame, the S&P 500 has risen just 4.44%. As the price of Bitcoin has done well year to date, Strategy shares have followed (and frankly outperformed). Despite this, my concern going forward is not that shares have outperformed. My concern is that future growth is going to be fueled by unsustainable preferred stock. The company has raised a total of $10 billion in fresh capital in 2025, ($6.6 billion in equity, $3.4 billion in debt), building on a record $18.1 billion in Q4 2024 and bringing total Bitcoin holdings closer to 600,000 coins. Strategy owns nearly 3% of all 21 million Bitcoins that will ever exist. I’m tracking institutional demand for yield-bearing crypto products. Strategy’s Bitcoin-linked preferred shares (STRK, STRF, and STRD) offer a compelling yield. But will this yield turn out to be unsustainable given this is often a cash payment when the company cannot support cash payments with little revenue? This is my major concern. At the core of why I am doing follow-up coverage, I want to talk about what, I think, is a flip in their capital structure. Previously, MicroStrategy (now Strategy), was what, I believe, was ‘well capitalized.’ The company has no preferred shares, and convertible notes that convert into common stock once shares go above a certain price. Now, Strategy has Preferred shares (which pay a dividend unless this dividend is suspended). I think this sets a dangerous precedent. This is the opposite of the capital structure I originally saw that made me fascinated by the asset acquisition model (can’t really call it a ‘business model’). With this, I am doing follow-up coverage because I believe that Strategy may be at a turning point (and not for the better). Strategy needs to keep its preferred shares in check, which will slow its Bitcoin yield per share. This is a major issue. Unsustainable Debt At the heart of my downgrade on Strategy is my view of their now increasingly leveraged balance sheet. To review, when I last wrote on Strategy back in January, their capital structure consisted of two main securities: Common stock owned by shareholders. This trades under “MSTR” here in the US. Issuing common shares has little impact on the long run viability of the company (leverage wise). Convertible notes, many of which pay 0% interest, are non-recourse loans, and often will convert into stock. These also have not concerned me because they don’t bleed capital (in terms of interest payments) in the event of a Bitcoin drawdown with the company still having to service their debt. In essence, common shares (and convertible notes) cost the company zero on an accounting or cash basis until the convertible notes mature. Their new instruments (STRF), ( STRK ), and ( STRD ) all have their host of interest payments). These are all forms of preferred stock. So, unlike their convertible bonds that have a maturity date (but no interest payments), these have no maturity date (but have a ton of interest payments). (STRD) is the newest of the three preferred share offerings. The first two are summarized nicely by the company’s most recent 10Q (table from 10Q below). Preferred Stock Share classes Q1 (Seeking Alpha) For “STRD,” their most recent offering, preferred shares yield 10% per annum. Dividends are not cumulative; meaning if the board does not declare a dividend, then no backpay of dividends is owed. To me, the net result of this is a catch 22 now for Strategy. Either they pay the 8-10% nominal yield on these securities per annum (and see a huge cashflow drag that is not supported by revenue and will require more stock issuances), or don’t pay these cumulative dividends and make investors of the preferred shares question if there is going to be some sort of liquidity risk with their investments. After all, preferred shares theoretically are outstanding forever. So, if Strategy fails to pay a dividend, what are the odds new investors will finance new preferred shares? I say all of this because I believe that while Bitcoin’s price has touched all-time highs in the last few weeks, Strategy common shares have been lagging. I think common shareholders are starting to wonder if the Bitcoin yield per share is sustainable (or if all of this will need to be paid back to creditors eventually). While I am not a shareholder, I am wondering this too. Valuation To be clear, I have no idea what strategy is worth at this point (hence why I am rating them a hold vs. a buy or a sell). When I last wrote on them, I implied that there could be up to roughly 30% upside in shares. Since then, we have seen shares jump by 26% pricing in most of this upward swing. According to Strategy’s valuation metrics , the company has a trailing twelve months price-to-book ratio of 3.24, which is 5.56% lower than the sector median of 3.43. Seeking Alpha Quant gives the company a grade of a C+ on this metric. The biggest issue is the knockout risk that comes from MicroStrategy/Strategy failing to refinance debt and this leading to the collapse in shares of the Bitcoin treasury company. Since there is now billions of dollars of convertible debt and preferred stock on top of common shares, the effective “Bitcoin yield” to shares is a little bit skewed and maybe misrepresenting what the actual Bitcoin yield is. For example, if Strategy buys Bitcoin now and finances it using preferred stock that costs them 10% in annual preferred dividend payments, this means that for the Bitcoin per common share yield to increase, the price of Bitcoin would need to increase by more than 10% per annum. This is technically possible since Bitcoin has compounded at roughly 57% CAGR over the last 5 years according to Strategy chairman Saylor. This is not guaranteed going forward, however. In fact, if we were to see Bitcoin compound at a rate less than 10% per annum over any period of time, technically the Bitcoin yield would turn negative. Since it appears we may be near the end of the 4-year bull run cycle in Bitcoin, I think there is a real risk it underperforms over the next few years. This is a huge risk now with preferred stock on their capital stack. It’s the main reason why shares are a hold now. Bull Thesis Even though I am downgrading shares of Strategy, this doesn’t mean that there is not a bull thesis. At the end of the day, the whole story with Strategy comes down to execution. With this, the main question: can the firm execute its innovative 21/21 plan and create net shareholder value with the combination of debt plus far more equity. The 21/21 plan is a now shareholder approved proposal to raise $21 billion of equity and $21 billion of fixed income over the next three years. On the surface, I still believe buying up large amounts of Bitcoin via equity and leverage is a bullish play if the network can figure out its Quantum hacking risks (more on this another time with an article that focuses on Bitcoin directly). The risk now is regulatory. The biggest risk with this plan is not even the interest on the debt that Strategy now has to pay. The biggest risk (I believe) is the 15% corporate AMT on unrealized gains under the Inflation Reduction Act could force Strategy to sell Bitcoin starting in 2026. This would be a very concerning outcome. Saylor, a Bitcoin enthusiast, has been arguing for years he would never sell any of Strategy’s Bitcoin. It could create a sticky situation for Saylor and Strategy. In essence, this AMT tax works as a minimum tax on “adjusted financial statement income” which includes unrealized gains from (among other things) cryptocurrency investments. This is Strategy’s whole business. While some cryptocurrency firms have requested exemptions from the AMT, there is no guarantee that Strategy will earn an exemption. Starting in 2026 , companies will be forced to pay this AMT (unless they get an exemption). This could be a multi-billion dollar tax bill for Strategy alone. Bottom Line While Strategy may remain one of the purest equity proxies for Bitcoin upside, I think the biggest risk now is that the preferred stock the company has on its balance sheet may get too metaphorically heavy. Historically, as Bitcoin grew, Strategy grew along with it, simply because of how much Bitcoin the company owns and how Saylor sliced the risk appetite up based on the company’s different share classes/convertible notes. The biggest risk with preferred stock is not even that it’s perpetual. The biggest risk is that the debt pays an interest rate that (depending on the specific tranche of preferred stock) may have to be a cash dividend. This is a tough pill to swallow. Bitcoin will inevitably have its drawdowns in the future. Saylor will have to fund these interest payments with either the sales of Bitcoin (bad idea for investor trust) or via issuing more debt. At this point, you’re talking about issuing new principal debt to pay off the interest on the previous debt. While this is how the US government runs, this is not sustainable for a single company. It frankly is probably not stable for the US government either. For long-term Bitcoin bulls, Strategy may still offer a high-conviction, high-reward vehicle. Its currently expanding Bitcoin treasury could really be the only paths to justify the risk diffusion complexity and common share volatility. With this, shares are downgraded from a buy to a hold.

Source: Seeking Alpha