Why Strategy Stock May Never Make It Into the S&P 500 — Barrons.com
Andrew BaryStrategy missed the cut for admission into the S&P 500 Friday when three additions were announced — AppLovin, Robinhood Markets, and Emcor — and it could be tough for the big Bitcoin holder to be chosen.Why? The company looks more like an exchange-traded fund or closed-end fund than an operating company with ample recurring revenue and profits. S&P Dow Jones Indices specifically excludes ETFs and closed-end funds from the S&P 500, as well as from the S&P Midcap 400 and S&P Small Cap 600.The company's strategy is to issue equity — mostly common stock and some preferred — and buy Bitcoin, making it a giant repository of the cryptocurrency. Would a company that did the same with gold likely be considered for admission into the S&P 500? Probably not.S&P Dow Jones Indices doesn't comment on why certain companies aren't in the S&P 500 or its other major indexes. The index committee there has considerable discretion about what companies are added. Strategy didn't immediately reply to a request for comment.Strategy shares were down 2.2% to $328.20 Monday despite a nearly 1% rise in Bitcoin. There had been speculation late last week that Strategy would be added to the S&P 500 in conjunction with its quarterly rebalancing, which is taking place this month.Another indication that Strategy won't be added soon is that the company is counted as a software company by S&P Dow Jones Indices in its global industry classification standard, or GICS. That appears to reflect that Strategy's primary business was software until it moved to begin acquiring Bitcoin five years ago.While the software business remains active, operating near break-even with about $500 million in annual revenue, it is nowhere near large enough to qualify for S&P 500 index inclusion.Strategy is now more of a financial company, given that its business now is dominated by its Bitcoin holdings. Strategy owns about 638,000 Bitcoin — about 3% of the total outstanding — now worth around $72 billion. It is the largest corporate Bitcoin holder in the world and has a market value of $94 billion.At the same time, Strategy's earnings are volatile and are driven by the changes in the value of its Bitcoin holdings. The company earned $14.03 billion in the second quarter from operations, but $14 billion of that came from the unrealized gain on the value of the company's Bitcoin holdings as Bitcoin appreciated during the period.Given that Bitcoin is up about 5% so far in the third quarter to $112,700, including a 1% gain Monday, Strategy likely will report a profit for the current quarter. But if Bitcoin drops in price, Strategy likely would report a loss for that period.The S&P 500 already has exposure to the crypto economy through Coinbase, which was added earlier this year and is classified as a financial company.Strategy Chairman and controlling shareholder Michael Saylor said on CNBC on Monday morning that he wasn't expecting the company to be included in the index so quickly."This is a brand-new novel concept. Every quarter, we make new believers, " Saylor said. "I think that will continue for the foreseeable future."On Saturday, he tweeted a graphic showing the 92% annualized return on Strategy stock since the company began its Bitcoin accumulation strategy.With a market value of $94 billion, Strategy is now the largest U.S. company not in the S&P 500 index. It does meet the admission criteria, including a market capitalization of more than $22.7 billion and profitability in the most recent quarter and over the past year.But these criteria make Strategy's inclusion contingent on Bitcoin prices. A period of Bitcoin declines would result in losses that would prevent its inclusion.Benchmark analyst Mark Palmer, who is a bull on the stock, wrote Monday that the company probably didn't make the cut on Friday because of its earnings volatility. He is upbeat nonetheless that Strategy will make it into the S&P 500, saying the index committee may want to see another quarter or two of "clean" earnings prints before adding Strategy.The "variable that likely will matter most is the committee's comfort with the durability of MSTR's earnings profile alongside its role as the largest corporate bitcoin holder," he wrote.Being a giant Bitcoin repository may not be enough for inclusion in the S&P 500, however. No company like Strategy has been admitted and there are strong reasons for excluding it.Write to Andrew Bary at [email protected] content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.