Strategy: Time To Accumulate

Summary The company raised over $25 billion in FY25, acquiring roughly 225,000 Bitcoin and driving 22.8% annual Bitcoin yield. Management plans $6–10 billion in annual digital credit issuance, targeting 5%–14% yearly Bitcoin yield expansion. Preferred equity carries an 11.25% dividend, while a $2.25 billion cash reserve covers over two years of obligations. Holdings total more than 713,000 Bitcoin at a $76,000 average cost, creating $17.5 billion unrealized Q4 losses. Annual interest and dividend commitments reach $888 million, increasing dependence on Bitcoin appreciation and capital markets access. Investment Thesis MicroStrategy ( MSTR ) is doubling down on its approach to accumulating more Bitcoin ( BTC-USD ) by utilizing structured digital credit to increase its amount of Bitcoin per share. The approach relies on controlled issuance of capital and an expectation that appreciation of Bitcoin will outpace costs of funding. In the near term, MSTR continues to be challenged by falling another 14% following a decline in Bitcoin. The main driver of MSTR’s direction remains appreciation of Bitcoin. Data by YCharts MSTR Targets 5%–14% Annual Bitcoin Yield via $6–10 Billion Digital Credit Issuance I see Strategy holds a capacity to derive accretive value through the issuance of digital credit instruments, mainly like the Stretch ( STRC ) product. This operational function works by raising capital at a fixed cost and deploying the proceeds into Bitcoin, thereby increasing the Bitcoin/share metric. MSTR raised over $25 billion in total capital during FY25. This capital inflow funded the acquisition of ~225,000 Bitcoin in FY25. The main metric tracking the efficacy of this operation is Bitcoin Yield that has hit 22.8% for FY25. This means that the holdings of Bitcoin per outstanding share increased by that percentage. It is outpacing the dilution caused by issuing new equity/credit instruments. Q4 Earnings In my view, the Stretch product is the engine for this accretion. MSTR issues these preferred equity securities with a target dividend yield of 11.25% and a target price of $100. By paying a fixed 11.25% cost of capital whereas the underlying asset (Bitcoin) historically appreciates/is acquired at a rate that increases the per-share holding, MSTR captures the spread. Bitcoin is a 43% ARR asset in Strategy's view and the cost of the credit instrument is fixed. This simple arbitrage permits MSTR to accumulate Bitcoin faster than it dilutes stockholding. The presence of $6.9 billion in preferred equity on the balance sheet marks a shift from convertible debt that carries maturity dates and repayment obligations to perpetual instruments that do not require principal repayment. I believe this structure removes the pressure of refinancing walls/redemption events and providing Strategy a permanent capital base for asset acquisition. A main component of this model is the $2.25 billion cash reserve established in Q4-FY25. This reserve provides over 2.5 years of dividend coverage for the preferred equity and interest payments on convertible notes. So, the existence of this liquidity buffers the dividend obligations from the short-term price volatility of Bitcoin. In my opinion, Strategy does not need to sell Bitcoin to service the 11.25% yield on STRC/the interest on convertible notes. This separation confirms that the Bitcoin holdings can compound over time. Strategy can utilize this cash reserve for any corporate purpose that includes satisfying credit obligations/paying dividends, despite market conditions. Q4 Earnings The forward financial benefits from this structure is based on the continuous asset growth independent of operating profits from the software business. Strategy’s management projects selling $6 billion to $10 billion of digital credit annually over the next 7 years. In a low scenario involving $6 billion of annual sales, Strategy estimates a 5% annual Bitcoin Yield. In a more aggressive scenario with lower interest rates allowing for 16%-20% digital credit sales, the model projects a 10%-14% annual Bitcoin Yield. This programmatic issuance ensures that the Bitcoin backing each share of MSTR stock increases. As the Bitcoin per share metric rises, the intrinsic value of the MSTR equity rises if Bitcoin price remains stable/increases over the long term. Finally, the volatility stripping effect supports the valuation of the MSTR stock. How? By isolating the volatility into the equity tranche and offering a stable high-yield product to fixed-income market participants, MSTR branches out its capital structure. STRC absorbs capital seeking yield with low volatility (targeted at 7% volatility) and MSTR stock absorbs the amplified volatility and the accretive upside of the Bitcoin Yield. This structure expands the pool of available capital and it is going beyond traditional equity buyers to include yield-focused fixed-income allocators. With the access of this deeper pool of capital at a fixed cost enables Strategy to scale its Bitcoin holdings more aggressively than if it relied solely on equity issuance/operational cash flow. Bitcoin Must Exceed $76,000 to Reverse $17.5 Billion Losses and Restore Equity Value As per my view, the core risk that Strategy is facing is the inversion between the average cost basis of its Bitcoin holdings and the market price of Bitcoin. MSTR holds 713,502 Bitcoins (714,644 as of now) with an average acquisition cost of $76,000 per Bitcoin . However, the market price referenced in the Q4 is ~$60,000 to $69,900. This disparity means Strategy is deeply underwater on its main asset. The immediate result is a massive reported loss. In Q4 alone, MSTR recorded an operating loss of $17.4 billion and a net loss of $12.6 billion based on the mark-to-market decline in the fair value of its digital assets. The total unrealized loss on digital assets for Q4 stood at $17.5 billion . I see this cost basis inversion as a severe drag on Strategy's GAAP financials as MSTR adopted fair value accounting. It means every downward fluctuation in Bitcoin price below the cost basis flows directly through the income statement as a loss. This results in negative EPS and obscures the operational performance of the legacy software business. The valuation metrics reflect this strain. The Net Income Margin and ROE are negative and the P/E ratio is highly volatile and non-meaningful in trailing periods. I think a continued reporting of multi-billion dollar losses can restrict the institutional capital allocators to hold the stock. Q4 Earnings Thus, the negative spread between cost and market value puts pressure on the book value of MSTR. Strategy essentially deployed $54 billion of capital to acquire assets that are now worth approximately $45 billion to $50 billion (based on the fluctuating prices mentioned above). This destruction of book value leverages the balance sheet negatively. The net leverage ratio is currently reported at 13%, but a further decline in Bitcoin price increases this leverage ratio relative to the asset base. A decline to $8,000 per Bitcoin would equalize the asset value with the net debt and theoretically render the equity worthless in liquidation terms. Although this is an extreme scenario, in my opinion, the high cost basis of $76,000 still means that MSTR requires a considerable asset price recovery just to hit a breakeven point on its balance sheet capital allocation. Data by YCharts Looking forward, financial performance is hurt by the burden of servicing the capital used to acquire Bitcoin. Strategy has annual interest and dividend obligations totaling $888 million and this includes $713 million in dividend obligations from cumulative preferred stock and interest on convertible notes. The $2.25 billion cash reserve provides a mid-term buffer, but Strategy must derive cash to service these costs. The Bitcoin asset itself derives no organic cash flow. Therefore, Strategy must depend on either the legacy software business that derives limited cash relative to the size of the treasury or the continuous issuance of new capital to pay for old capital. If the share price remains depressed due to the asset value being below the cost basis, this raising new equity option may become more dilutive and hit hard on the Bitcoin Yield metric. Takeaway Effectively, MicroStrategy is a leveraged compounding instrument in Bitcoin, and if the trend of Bitcoin is upwards, then the value of shares can be significantly magnified over time. However, the reverse is also true and for an investor, it’s a high-conviction, high-volatility play, but one that’s appropriate only if an investor is convinced that the long-term trend of Bitcoin is upwards.