This article first appeared on GuruFocus.
Bitcoin’s (BTC-USD) latest selloff is turning into something more than a price chart story for Strategy Inc. (NASDAQ:MSTR)it’s becoming a financing story. The company’s preferred shares have been sliding in lockstep with the crypto slump, including a $1.2 billion 10% series that was priced at 85 cents in June and now trades at 66 cents, pushing the yield to 15% based on Bloomberg data. For a firm that has issued almost $7 billion of preferred stock this yearstock carrying nearly $700 million in annual dividendsthe market is signaling that future issuance could be considerably more expensive than what Strategy has enjoyed so far.
That rising cost matters because Strategy’s model depends heavily on staying plugged into capital markets. S&P Global Ratings keeps the company at B-six steps below investment grade and just one notch above triple-Creflecting what analyst Diogenes Mejia describes as a narrow margin for error if Bitcoin enters a more prolonged downturn. Strategy keeps very little cash on hand before converting it into Bitcoin, which means dollar- and euro-denominated preferred dividends must be funded by issuing new securities. While the company could skip preferred dividends, doing so might deter new buyers and, in some cases, even grant certain holders rights to a board seat.
Even so, some analysts are not ready to paint this moment as anything close to a breaking point. TD Cowen’s Lance Vitanza, who currently recommends buying the common equity, argues that the company’s survival through the sharp 2022 Bitcoin decline suggests today’s drop, while painful, may not rewrite its long-term trajectory. But the tension is unmistakable: preferred yields are rising, financing conditions may tighten, and the company’s ability to keep accumulating Bitcoin is now tied more closely than ever to investor appetite. As Mejia puts it, the model can keep running as long as Strategy maintains market accesseven if the road ahead could be bumpier than the firm would prefer.
