MicroStrategy Stock Drops 9%. New Equity Guidelines Could Be the Reason.

MicroStrategy is the largest corporate Bitcoin holder with about 679,000 coins, roughly 3% of the Bitcoin outstanding. CEO Michael Saylor speaks at the Bitcoin 2021 Convention. (Getty Images)

MicroStrategy shares fell nearly 9% Friday, and a reason why could be its new policy on common equity issuance, which limits its ability to buy more Bitcoin.

Shares of the company, which does business as Strategy, were down 8.7% to $366.63. The stock underperformed Bitcoin, which was down 1.9% to $113,600.

MicroStrategy is the largest corporate Bitcoin holder with about 679,000 coins, roughly 3% of the Bitcoin outstanding. That stash is now worth around $71 billion.

While the company’s shares are more volatile than Bitcoin, the big decline Friday suggests something else could be occurring, and the changes announced with its second-quarter earnings report Thursday may be the culprit.

MicroStrategy—which has been a huge seller of common stock through at-the-market offerings to fund purchases of Bitcoin, including $5.2 billion in the second quarter—unveiled a new framework for issuing equity.

The company said it wouldn’t issue common shares to buy Bitcoin if its enterprise value divided by the dollar value of its Bitcoin is below 2.5 times. That ratio is now under 1.7, according to the company’s website.

When the ratio is under 2.5, MicroStrategy will issue equity only to pay interest on its debt and fund preferred stock dividends. The company has issued $6 billion of preferred this year and it now has about $600 million of annual dividend payments on that preferred stock—funds that will be financed with equity sales, according to MicroStrategy.

It appears that MicroStrategy will rely on preferred stock sales for now to fund Bitcoin purchases, but preferred stock financing is expensive for the company in the 8% to 10% range, including a large recent $2.5 billion preferred issue known as STRC for its Nasdaq ticker symbol that yielded an initial 10%. Preferred stock is different than common equity.

The new framework sets a high bar—the ratio has been around two or lower in recent months and the stock has rarely traded above 2.5 times.

The stock would have to rise to about $600, more than 60% above the current price, for the ratio to hit 2.5, based on our calculations and the company’s earnings presentation Thursday.

Here’s how MicroStrategy chairman Michael Saylor explained the new framework on the conference call:

“I talked about the fact that we think MSTR is undervalued in some cases, perhaps, significantly undervalued. And even though issuing equity anywhere above a 1.0x mNAV is accretive to Bitcoin Yield and Bitcoin Gain, we will, on a go-forward basis, be more disciplined about how we issue our MicroStrategy ATM.” ATM refers to at the market equity sales.

Saylor argued that the company’s many advantages ought to result in a higher price/Bitcoin value ratio than that the stock now commands.

Benchmark analyst Mark Palmer, who has a Buy on the stock, praised the company’s move.

“While Strategy’s various issues of perpetual preferred stock may seem expensive to the company based on their dividend rates in the 8-10% context, the issuance of these hybrid instruments is ultimately less expensive to the company than common equity in terms of its cost of capital,” he wrote Barron’s in an email.

“Strategy is seeking to avoid diluting equity holders except in cases in which doing so is highly accretive, and perpetual preferreds have the benefit of no fixed maturity,” he wrote. Palmer added that it is likely that preferred stock issuance dividend costs will drop as investors get more comfortable with the securities.

Saylor has highlighted that point, arguing the company’s new variable-rate preferred, called STRC, could ultimately carry lower yields than the current 9%-plus.

Barron’s wrote critically on MicroStrategy in late 2024, arguing investors were paying too high a premium to access Bitcoin through the stock and that Bitcoin ETFs such as the iShares Bitcoin Trust are a better play for crypto investors.

Since then, the ETFs have outperformed as the premium has contracted on the MicroStrategy stock from about two times the value of Bitcoin. Until about two years ago, MicroStrategy stock often traded around parity to its Bitcoin holdings.

Unless MicroStrategy stock rallies sharply, the company may be buying less Bitcoin in the coming weeks and months than earlier this year and that prospect may be dampening the stock. It may be hard to get investors to pay 2.5 times the value of the company’s Bitcoin stake when they can buy ETFs at parity.

Write to Andrew Bary at andrew.bary@barrons.com