Strategy Stock Has Hit a Wall. Expect More Losses Ahead, This Analyst Says. — Barrons.com

By Nate Wolf

Shares of Strategy, the company formerly known as MicroStrategy, have dropped nearly 19% in the last month, and the carnage is bound to continue, one analyst warns.

Gus Galá of Monness, Crespi, Hardt reiterated a Sell rating and a $175 price target for the crypto-dependent stock in a research note Thursday, in part citing the volatility and cyclical nature of Bitcoin.

Strategy shares were down another 2.4% to $336.48 on Thursday.

The company has garnered attention and investment for becoming the largest corporate holder of Bitcoin. This so-called Bitcoin treasury, rather than Strategy's legacy enterprise-software business, makes up the bulk of its market value.

By selling equity and bonds to finance its Bitcoin purchases, Strategy stock has essentially become a levered play on the cryptocurrency. The gambit has been rewarding for shareholders. Despite the recent selloff, Strategy stock has climbed more than 140% in the last 12 months, as Bitcoin soared to new highs.

But Bitcoin comes with downside volatility, too, Monness Crespi Hardt argued.

"We continue to argue BTC Treasury [companies] are symptomatic of later stage BTC upcycle," Galá wrote.

Disproving that argument would require Bitcoin breaking from its history as a boom-or-bust asset and continuing its bull run into the foreseeable future, Galá said.

Strategy didn't immediately respond to a request for comment.

At times, the company has traded at a market capitalization more than double the amount of crypto it actually held. At its current 1.34-to-1 premium, investors shouldn't add to any short positions, Galá argued, but they shouldn't be long on Strategy either.

In fact, that market cap-to-Bitcoin multiple is bound to decline in part because of the credit market's skepticism of the debt that Strategy has issued to finance some of its purchases.

"We are dubious that the credit ratings agencies will be particularly amenable to issuing investment grade ratings (especially in the near term) to treasury strategies given the nature of profits are essentially all unrealized gains," Galá wrote.

An investment grade rating would perhaps allow the company to issue and repay its debt at more typical term structures. But this would require Bitcoin to act more as a digital gold safe-haven, Galá added.

Write to Nate Wolf at nate.wolf@barrons.com

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