Strategy (MSTR) has become a focal point among Wall Street analysts as a prominent proxy for Bitcoin investments. Over the past year, the stock has experienced an impressive surge of 143%, closely following the upward trajectory of Bitcoin itself. However, Monness analyst Gus Gala has raised concerns that this momentum may not be sustainable in the long term.
In a recent research note, Gala reaffirmed a Sell rating on Strategy, maintaining a price target of $175. This target suggests a stark potential downside of approximately 50% from current trading levels. Gala highlighted that the premium that the stock holds above its Bitcoin assets has significantly diminished, indicating that there is still potential for this premium to decrease further.
Adding to the complexity, the company recently acquired 525 additional Bitcoins, increasing its total holdings to 638,985 BTC. This acquisition was funded through preferred share transactions that generated around $68 million, diverging from previous strategies that involved selling new common stock. Despite this funding approach, Gala expressed concerns that employing preferred shares, along with stock sales, to manage debt interest may eventually erode the value held by existing shareholders.
Gala underscored that the funding strategy adopted by Strategy involves increased reliance on issuing new shares, exacerbated by the challenging conditions in traditional debt markets. Nearly 90% of the company’s recent fundraising efforts have occurred through common stock, which not only dilutes the stakes of current investors but also places added pressure on the overall valuation of the company.
Furthermore, the analyst pointed out that the decreasing volatility in the market has rendered Strategy’s convertible debt strategy less effective. The proliferation of similar firms employing equivalent Bitcoin treasury models has diminished the distinctiveness of Strategy’s approach, increasing competitive pressures.
On the valuation side, Gala noted that the stock’s premium over its Bitcoin holdings has lessened and is likely to continue compressing. Currently, the stock trades at a multiple of 1.3x, which is approaching the peer group median of 1.21x. With this premium no longer appearing attractive, he anticipates ongoing downward pressure on the stock’s multiple, limiting any potential upside.
Despite these concerns, Strategy stock maintains a consensus Strong Buy rating among 13 Wall Street analysts. This consensus is based on 12 Buy recommendations and one Sell, indicating a generally optimistic outlook. The average price target for MSTR stands at $562.62, suggesting a potential upside of about 71.64% from its current levels.
As investors assess the future of Strategy in light of these developments, the outlook remains mixed, with some analysts urging caution and others holding a more favorable view.
