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Michael Saylor's Strategy Just Boosted Its Cash Reserve to $3.75 Billion. Here's Why I'm Bearish on the Stock.
Key Points
As the world's largest Bitcoin treasury company, Strategy's performance is tied to the price of Bitcoin.
As long as Bitcoin remains mired in a slump, so will Strategy.
At one time, investors were willing to attach a premium to the stock, but not any longer.
The good news, if you're a Strategy (NASDAQ: MSTR) investor, is that the world's biggest Bitcoin (CRYPTO: BTC) treasury company is taking major steps to repair its balance sheet. Its cash reserves now stand at $3.75 billion, and the company has publicly committed to propping up its share price.
The bad news, however, is that it might be a case of too little, too late. Strategy (the company formerly known as MicroStrategy) hasn't bought any new Bitcoin in over five weeks, and the value of its common and preferred stock continues to decline, no matter what CEO Michael Saylor does.
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Strategy can only go up if Bitcoin goes up
This may be oversimplifying things, but the price of the stock can only go up if the price of Bitcoin goes up. And that's simply not happening in 2026. The crypto market is down nearly 30% for the year, which puts Strategy in a quandary.
That's because the company is a highly leveraged bet on Bitcoin. It essentially does nothing but buy and hoard it, so its overall valuation is highly tied to the price of the digital currency.
Image source: Getty Images.
At one time, investors were willing to pay a premium for the stock, largely because they believed it might eventually become a "Bitcoin bank." But not any longer. The company holds 843,775 Bitcoin, currently valued at about $53 billion. By comparison, the business's enterprise value is $54 billion.
At the end of the day, Strategy needs cash to buy Bitcoin and to pay its preferred stockholders, as well as to fund ongoing operations. Since the company does nothing but buy the crypto, it must depend on a never-ending flow of outside capital. That means constantly selling new common and preferred stock.
That only works if the digital coin is rising in value. Investors are willing to buy new stock offerings and attach a premium to Strategy stock. But when Bitcoin is stagnant or losing value, the financial flywheel stops. That explains why the company hasn't bought any new tokens in five weeks.
Just check out its latest earnings report. The company lost more than $8 billion in the quarter, and nearly all of that was due to impairment losses on its Bitcoin holdings. The math just doesn't work anymore. The average purchase price of the crypto for Strategy is $75,482, but the current price of Bitcoin is $62,700.
So, as long as the cryptocurrency remains under $75,482, the company will continue to report huge losses. And who wants to invest in a company that only loses money?
Is the Bitcoin treasury company model broken?
At one time, Strategy stock was a wonderful proxy for the crypto. But as soon as new spot Bitcoin exchange-traded funds started trading in early 2024, there was suddenly much less need to invest in Strategy to get Bitcoin exposure.
As for me, I'm avoiding Bitcoin treasury companies completely, even those trading at a premium to their holdings. At this point, you're better off just investing in the digital currency directly.
Dominic Basulto has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.