Strategy raises preferred stock yield to 10.5%, is it a continuous infusion for hoarding Bitcoin?

According to Bloomberg, Michael Saylor, founder of Strategy Inc., is increasing the yield on its preferred stock to address weak demand and continue its billion-dollar Bitcoin bet. The digital asset vault company announced that the yield on its variable-rate Series A perpetual preferred stock (STRC) will rise by 25 basis points to 10.5% in November. Despite the rise in Bitcoin's value leading to a net income of $2.8 billion for the company in the current quarter, its stock premium has significantly shrunk, with growing investor concerns over dilution, forcing Saylor to seek new sources of funding.

Saylor Increases “Bitcoin Bet”: Preferred Stock Yield Rises to 10.5%

In order to support weak demand and maintain its aggressive Bitcoin purchasing strategy, Strategy Inc. Chairman Michael Saylor has decided to increase the preferred stock yield, which serves as the company's main source of funding.

• Yield Increase: Strategy Company announced that the yield of its Variable Rate A Series Perpetual Deferred Preferred Stock (STRC) will increase by 25 basis points in November, reaching 10.5%.
• Net Income Driven by Accounting Standards: Strategy reported a net income of 2.8 billion USD for the third quarter, primarily due to the unrealized gains generated from its cryptocurrency reserves valued at approximately 69 billion USD.

Saylor stated: “We believe we are at an inflection point, as the maturity of the Bitcoin asset class and decreasing volatility has led to a decline in our multiple relative to net asset value.” This reveals the reason for the company's actions: the premium of Strategy stock relative to the value of the Bitcoin it holds is disappearing.

Premium Shrinkage and Low Demand: Two Major Concerns for Investors

Despite Bitcoin reaching an all-time high in the third quarter and dozens of listed companies following the “corporate treasury” model pioneered by Saylor five years ago, investors are starting to question this strategy.

• Stock price decline: The stock price of Strategy has fallen about 45% since it reached an all-time high last November, wiping out most of the premium its stock price enjoyed relative to Bitcoin holdings over the years.
• Weak Demand for Preferred Shares: The demand for preferred shares has also been lackluster, with recent sales far below Saylor's ambitious financing targets, leading to a slowdown in Bitcoin purchases in recent weeks.
• Dilution Concerns: As the premium decreases, investors' concerns about further dilution are triggered. Previously, Strategy promised not to issue new common stock at a price lower than 2.5 times its net asset value, although the company subsequently sold more common stock.

The new financing strategy of Strategy: International market and ETF layout

In response to the weak domestic demand, Strategy is seeking new financing avenues.

• Targeting the International Market: CEO Phong Le stated that Strategy is seeking international markets to raise funds.
• Consider launching an ETF: The company is also considering launching a exchange-traded fund (ETF) based on preferred stock.
• The Benefits of Increasing Returns: Mark Palmer, a stock analyst at Benchmark Equity Research (who rated Strategy as “Buy”), believes that the incremental interest expenses resulting from increasing STRC yields will be negligible compared to the positive impact of the company raising capital through STRC and purchasing Bitcoin.

Strategy incurs approximately $689 million in interest and dividend expenses each year. The company's legacy enterprise software business revenue grew 11% to $128.7 million, exceeding analysts' average expectations, but the market focus remains on its Bitcoin strategy.

Conclusion

Michael Saylor's initiative to increase preferred stock yields is a necessary action taken by Strategy to maintain its aggressive Bitcoin accumulation strategy and is a direct response to weak market demand. Although the unrealized gains from its cryptocurrency reserves make its financial report impressive, the shrinkage of stock price premiums and investor concerns about dilution are forcing Saylor to continuously seek more creative and risky financing methods. For investors focused on the Bitcoin treasury model, the fluctuations in STRC yield will be a key indicator of Saylor's bet on sustainability.