Strategy (MicroStrategy): Buy, Sell, or Hold?

Strategy (MicroStrategy) (MSTR 2.18%) has been one of the biggest winners of this market over the past couple of years. The stock has been up 1,900% since 2023, even with the recent 40% decline from the highs. The company is most known for centering its business model and identity around Bitcoin, and CEO Michael Saylor has arguably been among the most vocal supporters of Bitcoin for some time.

It's often wise to buy winning stocks on pullbacks. You might have heard the expression that winners tend to keep winning. And volatility? That's just the price of admission for market-beating returns.

But investors shouldn't mindlessly follow that thought; exceptions occasionally arise. Is Strategy worth buying on its dip? Or is the stock's decline the beginning of a larger unwinding that investors should avoid?

Here's whether Strategy is a buy, sell, or hold today.

The financial risk in Strategy's (no pun intended) strategy

Strategy began as an enterprise software company, but today, the business is all about Bitcoin. The company refers to itself as the world's largest Bitcoin treasury, aiming to monetize its Bitcoin assets in a digital global economy. Currently, the company has approximately 499,226 BTC at an average cost of $66,360. This represents most of Strategy's $64 billion market cap.

Frankly, Strategy is using leverage to accumulate Bitcoin. The company funds Bitcoin purchases by issuing equity (new shares) and convertible bonds. Since 2023, Strategy's share count has increased by 125%, and its outstanding convertible debt has risen to $6.2 billion. The debt's blended interest rate is only 0.557%, because creditors hope to convert the bonds into stock later at higher prices.

This has worked well because Bitcoin's price has risen nearly 400% since 2023 (even with the recent pullback). It's been a continuous loop:

1. Bitcoin's price goes up.
2. Strategy's stock price rises.
3. Management issues high-priced stock and borrows at cheap rates to buy more Bitcoin.
4. Repeat.

It almost sounds like some money glitch, but most leveraged bets do until they blow up, and Strategy's leveraged strategy (no pun intended) could unwind, too.

If prices (of Bitcoin and Strategy stock) fall enough, this loop could be broken. From there, numerous scenarios could result in significant share dilution, hurting shareholders. The company is unprofitable and must raise money to accumulate Bitcoin or repay its debt if the bonds don't convert to stock. So, it can issue shares, refinance its debt (at presumably worst terms), or liquidate Bitcoin.

None of these scenarios are good for the business or its shareholders, especially if prices are falling. It could create a similar loop in the opposite direction. Remember, leverage cuts both ways. If you look at significant bubble bursts from history, you'll find leverage at the root of most of them.

There's still a hefty premium in Strategy's stock

I'm not predicting that Strategy will endure such a worst-case scenario, but investors should realize this risk when owning the stock. Until Strategy profitably monetizes its Bitcoin, there's little reason to pay a premium for the stock beyond its Bitcoin's market value. I previously flagged this concern weeks ago.

Consider this: The current market value of Strategy's Bitcoin is approximately $41.4 billion, based on its current 499,226 BTC at a market price of $83,000.

The software business generated about $463 million in sales in 2024. It's not profitable, and revenue declined by 7% in 2024. You could generously value the software business at 10 times its revenue, meaning it would account for approximately $5 billion (rounding up) in market cap.

After subtracting that from Strategy's $64 billion market cap, there is about $41 billion in Bitcoin trading at a $59 billion market cap. That's a roughly $18 billion premium.

Is the stock a buy, sell, or hold?

Said differently, Strategy's share price could fall 25% to 30% and still trade on par with Bitcoin's market price. Again, there isn't yet any apparent reason why Strategy's Bitcoin should have any premium. The company hasn't yet built a business around its Bitcoin, other than accumulating and leveraging it to buy more.

If investors want investment exposure to Bitcoin, they could just as easily buy a spot Bitcoin ETF like the Grayscale Bitcoin Trust, which trades at just a 0.09% premium to Bitcoin's market price.

The stock seems like a sell until one of two things happens:

• Strategy's Bitcoin trades on par with market prices.
• The company generates meaningful profits from its Bitcoin assets.

Until then, investors are taking on a lot of risk and dilution when they can gain Bitcoin exposure from safer alternatives.