Strategy: Still Sticking With Series A Preferreds

Summary Strategy now holds over 600,000 BTC, but MSTR still trades at a significant premium to its Bitcoin holdings. I continue to like the STRF preferred shares far better than the common. STRF has an 8.4% effective yield and has outperformed MSTR since my last article. STRF is less risky than MSTR in both bull and bear Bitcoin scenarios, as dividends are realized returns and not dependent on BTC price appreciation. With potential rate cuts ahead, STRF may gain favor with income investors. I see it as the best way to gain exposure to Strategy at this time. Strategy ( MSTR )( STRF )( STRK )( STRD ) has officially surpassed the 600,000 Bitcoin ( BTC-USD ) threshold after announcing the purchase of another 4,225 BTC between July 7th and July 14th. The exact number of coins that the company now holds is 601,550. It’s a staggering number of coins and Strategy currently owns over 3% of Bitcoin’s 19.9 million circulating supply and 2.8% of the total supply that will ever be in existence. Data by YCharts It’s been an absolutely incredible run for both MSTR shareholders and BTC-USD holders with each seeing intense rallies from the ‘tariff tantrum’ in early-April. The relationship between Strategy and Bitcoin itself has become quite symbiotic over the last year; with Strategy’s ability to raise capital benefiting from the ever-increasing valuation of its Bitcoin collateral and Bitcoin’s price rising, in part, due to Strategy’s seemingly never-ending bid. I’ve actually been bullish MSTR in the past but flipped to a more cautious view when the shares started trading at a significant premium to the value of the BTC on the balance sheet last year. More recently, I’ve taken a liking to the preferred offerings, specifically the senior STRF shares, and have opined that the existence of the preferred stocks may even be to the long term detriment of the common stock. I closed my May Strategy piece with this: I won’t pay a premium for BTC through MSTR when I can just buy an ETF instead. But I have no problem letting Saylor pay me 10% while he dilutes his common stockholders. I’m long STRF. 5/3//25-7/14/25 (Seeking Alpha) Long STRF rather than MSTR has worked out considerably well since that early-May piece with the senior preferred stock generating a 35% total return in a little over two months. In this update, I’ll get into why I’m increasingly of the opinion that the common stock is the wrong way to play Strategy’s Bitcoin flywheel at this point in time. Lackluster STRD ATM Demand? In that same article I referenced from May, I compared the three different preferred shares currently offered by Strategy. At that time, I came to the conclusion that even though it was an interesting capital appreciation play, STRD was the inferior investment of the three senior shares for long term income-minded investors. I won’t re-write that entire piece, but my primary argument against STRD was that the dividends are not mandatory and not cumulative. Thus, Strategy could simply opt to not pay STRD shareholders at all if it felt it benefited the company. Subsequent to that May piece, Strategy announced a $4.2 billion ATM for STRD shares and had what I think is an alarming addition to the ‘use of proceeds’ section from the prospectus . The bold text below is my emphasis: We intend to use the net proceeds from this offering for general corporate purposes, including the acquisition of bitcoin and for working capital, and may also use the net proceeds for the payment of cash dividends on our STRF Stock and STRK Stock . Higher yields aside, the idea that proceeds could be raised from a tranche of preferred shares lacking mandatory dividend payments and then used to pay the dividends of an entirely different shareholder group had to give potential STRD buyers at least a little bit of pause. One week following the announced ATM, I think we have some possible signals from Strategy’s first July 2025 BTC purchases: ATM Program Used Shares Sold Notional Proceeds MSTR 797,008 – $330.9m STRK 573,976 $57.4m $71.1m STRF 444,005 $44.4m $55.3m STRD 158,278 $15.8m $15.0m Source: Strategy, July 7th-14th ATM sales In the first week following the announced STRD ATM, Strategy was able to bring in just $15 million through that offering and $101.8 million from the mandatory payment preferred tranches. I think there are two ways to look at this: Demand for Strategy’s junk tranche has diminished Strategy would rather raise capital from the products where proceeds exceed notional Number two is probably only true if the company believes the share prices of STRK and STRF are too high. I don’t think that is the case and I’ll get into why in the next section. Thus, I believe the lack of STRD issuance is likely more indicative of a demand problem. By itself, this is potentially concerning since the company intends to raise up to $4.2 billion with this product for the expressed purpose of paying previous investors. But perhaps the bigger signal in Strategy’s ATM use through the first half of July 2025 is that 70% of the capital used to buy Bitcoin this month has come from the MSTR ATM. Currently, there is $17.8 billion remaining on the MSTR ATM and a combined $26.2 billion left on the preferred share ATMs. Between the shares issued already from the ATMs and the initial offerings, Strategy owes $326.5 million in annualized dividend payments. Most of which is through the mandatory products. ATM Product MSTR STRK STRF STRD Remaining Availability $17,779.8 $20,450.9 $1,881.3 $4,185.0 Total ATM $21,000.0 $21,000.0 $2,100.0 $4,200.0 % Used 15.33% 2.61% 10.41% 0.36% Dividend % – 8% 10% 10% Annualized Payments of Remaining – $1,636.1 $188.1 $418.5 Source: Strategy, dollars in millions Importantly, if the company were to fully raise through all three preferred share product ATMs, the annual liability to those stock holders from the available shares would be an additional $2.24 billion – or a total of $2.56 billion counting the shares that have already been issued. Since these are annual payments in perpetuity, they pose a significant long term risk to Strategy’s BTC stack if the company can’t continue to dilute the common stock or raise capital through additional means. Of course, the rebuttal to this is the expectation that Bitcoin’s price will continue rising at a faster annualized rate than the 10% payments. Yet, even if we take that as a base case, it might still make more sense to long STRF over MSTR. Valuation Considerations It’s been mentioned many times before through Seeking Alpha pieces – my own included – that MSTR continues to trade at a sizable premium to the market valuation of the Bitcoin that Strategy holds. At a mNAV rate of 1.96, MSTR trades at nearly double the value of the company’s BTC: MSTR mNAV (StrategyTracker) While well below mNAV highs, some believe 1.96 is a rich valuation for the common; I’m clearly in that camp. Others see no issue with the premium. To each their own. I’m not going to dwell on it because readers likely already know where I stand and it’s a simple difference in philosophy. Rather, let’s explore the capital appreciation potential of STRF. STRF Appreciation Potential At $10 Annual Dividends Share Price Share Price at 7% Effective Yield $143 Share Price at 6.6% Effective Yield $152 Share Price at 6% Effective Yield $167 Share Price at 5% Effective Yield $200 Share Price at 4.44% Effective Yield $227 Share Price at 4% Effective Yield $250 Source: Author’s Calculations The table above shows the potential share price appreciation for STRF under different effective yield scenarios. At a 7% effective yield, the stock is worth $143. If STRF were to trade in line with the 12 month trailing yield of the iShares Preferred and Income Securities ETF ( PFF ), the stock would be worth $152. The US 10-year is currently yielding 4.44%. At par with the US 10-yr, STRF is worth $227 per share. And if we actually see rates go down in longer term US debt, the price of STRF could potentially re-rate even higher if income investors view BTC-collateral as a viable alternative to government bonds. But let’s just assume STRF can grow the stock price to an effective yield of 6.6%. I think this would be reasonable as it is in-line with other preferred stocks. At a closing share price of $118.5, STRF would see price appreciation of 28.3% before dividends at a 6.6% effective yield. If the mNAV of MSTR remains constant, Bitcoin would have to get to $154k per coin to justify MSTR over STRF on price appreciation. This is admittedly a hypothetical situation. However, I think STRF is misunderstood. Unlike MSTR, STRF can work in both Bitcoin bear and Bitcoin bull scenarios. Closing Takeaways One of the criticisms that I’ve seen online from MSTR longs who don’t hold Strategy’s preferred shares is the claim that 10% in fiat yield is trumped by the presumed ‘BTC Yield’ of the common stock equity. I don’t actually think that’s the correct way to compare the common with the preferred stock. First, dividends paid to STRF stockholders are realized returns. The ‘BTC yield’ of the common stock could actually go negative if Strategy is ultimately forced by the market to sell BTC to raise the capital for preferred share dividend payments. Second, BTC Yield is fundamentally an argument for assessing MSTR relative to the Bitcoin backing of each share. If that truly has any significance, why should the market pay double for the BTC held by the company through the common when the BTC is unproductive? Many expect the MSTR mNAV to go much higher. My base case is that it won’t. In a truly bearish Bitcoin scenario , mNAV could realistically go negative as it did in the past. And Strategy would still have to pay the STRF dividends with a preferred to BTC NAV collateral ratio of 5%. Finally, the market is expecting no less than two rate cuts through the remainder of the year by the Federal Reserve. If short term rates go down, investors may begin to get bullish longer duration debt. I would imagine a strong bid for STRF in such an environment. At this point, STRF is my only exposure to Strategy.

Source: Seeking Alpha