Strategy Cuts Outlook, Establishes $1.44 Billion Reserve Amid Bitcoin Selloff — WSJ
By Vicky Ge Huang and Nicholas G. MillerThe largest bitcoin-accumulation company took steps to insulate itself from the crypto selloff. The company's shares sold off anyway.Strategy, led by Michael Saylor, said Monday that it has raised $1.44 billion through a stock sale to help ensure it can meet future dividend and debt-interest payments. The reserve should fund 12-24 months of its preferred-stock dividends. The company said it also bought 130 bitcoin in the past two weeks, bringing its total holding to 650,000, valued at roughly $56 billion based on current prices.None of this appears to be helping Strategy's stock performance, which has lost nearly half its value this year. The company's market cap has dropped from a peak of $128 billion in July to $49 billion now, which is $7 billion below the value of its bitcoin holdings. Bitcoin currently trades at approximately $85,000 after falling below $81,000 in November.Strategy fell as much as 12% on Monday before paring losses. Shares closed down 3.3% at $171.42.The company's prospects are also closely tied to the performance of bitcoin.Strategy books paper profits when bitcoin rises above the price it paid for the digital token, and then lowers those marks when it goes down. And with bitcoin prices declining, Strategy has had to cut its outlook. The bitcoin treasury company said Monday that it now expects to report between a loss of $5.5 billion and a profit of $6.3 billion for the year, or between a loss of $17 and a profit of $19 on a per-share basis. The updated guidance is down significantly from the company's October guidance for a profit of $24 billion, or $80 a share.Alarming some traders, Saylor said Monday in a video presentation that the company could sell some of its sizable bitcoin stash or bitcoin derivatives."We would do that because that's in the best interest of the shareholders," he said.Saylor's comments come days after Strategy Chief Executive Phong Le said in a podcast that the company could sell some of its bitcoin holdings as a "last resort." Le said the company would sell bitcoin to fund its dividend payments if its market cap trades below the net asset value of its bitcoin holdings, a metric the industry coined as mNAV, and loses access to other forms of capital."Now, as we are looking at bitcoin winter, as we see our mNAV compressing, my hope is our mNAV doesn't go below one," he said. "But if we do and we didn't have other access to capital, we would sell bitcoin."Strategy currently has about $8.2 billion of convertible bonds outstanding. Those debts are due in about 4.4 years on average and come with a combined interest rate of 0.421%. It also has $7.6 billion in perpetual preferred stock with dividends. The dividend and interest payments on these two instruments cost Strategy $779 million annually, according to Mark Palmer, senior research analyst at Benchmark.Palmer said the figure is manageable. "The company has no debt covenants, no triggers, no margin calls that are baked into its capital structure, and that's by design," he said. "The company built a capital structure that was free of those constraints, because management understood that bitcoin historically has seen significant drawdowns."Adding to the pressure, Strategy is at risk of being removed from crucial stock indexes. MSCI has proposed cutting "digital-asset treasury companies" from its indexes if crypto tokens make up a majority of their assets. It cited concerns that they might resemble investment funds, which aren't eligible for the indexes. A final decision is due Jan. 15.If Strategy is cut from MSCI indexes, it could see $2.8 billion in passive outflows, JPMorgan analysts said in a recent research report. Overall, they estimated about $9 billion of the company's market cap is tied to passive, index-tracking exchange-traded funds and mutual funds.Saylor has defended Strategy's business model, stating that his bitcoin-buying company is an operating company and won't change course if it is dropped from influential stock indexes.Write to Vicky Ge Huang at [email protected] and Nicholas G. Miller at [email protected]