TLDR
- Benchmark defends Strategy’s move to issue equity for Bitcoin purchases, citing long-term benefits.
- Strategy purchased 4,048 BTC, bringing its holdings to 636,505 BTC.
- The decision to relax equity issuance restrictions was a necessary course-correction.
- Strategy is a top candidate for S&P 500 inclusion, though Bitcoin volatility may raise concerns.
Strategy, the Bitcoin Strategy company, made headlines recently with its decision to loosen a self-imposed constraint on issuing equity shares to fund Bitcoin purchases. This decision came under scrutiny, with some retail investors expressing concern over the potential dilution of shares. Despite the criticism, Benchmark analysts have come forward in defense of the move, saying it was a rational and necessary course-correction.
Earlier this week, Strategy purchased an additional 4,048 Bitcoins, bringing its total holdings to 636,505 BTC. The Bitcoin acquisition was funded by issuing new Class A common stock and perpetual preferred stocks. This decision marks a shift from Strategy’s previous stance, which restricted issuing equity unless the company’s market net asset value (mNAV) was at least 2.5 times its Bitcoin holdings.
Market Performance and Criticism
The decision to relax the mNAV constraint has been controversial. After the announcement, Strategy’s stock (MSTR) dropped over 20% in the past few weeks, though it has since recovered.
Benchmark’s Mark Palmer stated that the recent stock drop resulted not from mismanagement, but from a compressing market premium to its underlying Bitcoin holdings. Palmer explained that the stock’s underperformance was due to slower Bitcoin purchases, which led to the market speculating that the company would buy fewer Bitcoins.
Palmer argued that the real issue was the market’s reaction to a compressed premium on MSTR stock, which was exacerbated by volatile market conditions, both in the crypto and macroeconomic spaces. He noted that the relaxation of the equity issuance restriction restores flexibility, making it easier for Strategy to accumulate Bitcoin over time.
Strategy’s Long-Term Bitcoin Accumulation
Despite market concerns, Benchmark analysts believe that Strategy’s approach is ultimately beneficial in the long run.
Palmer emphasized that the firm remains one of the best and most liquid ways to gain exposure to Bitcoin’s upside without the risks associated with mining operations. He maintained a “buy” rating for Strategy and set a price target of $705 per share.
The company’s strategy of accumulating Bitcoin has been its main focus, and according to Benchmark, the relaxation of equity issuance constraints will enable Strategy to continue its aggressive acquisition of Bitcoin in the future. This move could strengthen the company’s position as a leading player in the digital asset space.
Potential S&P 500 Inclusion
Benchmark analysts also noted that Strategy is a strong candidate for inclusion in the S&P 500, especially considering its growing Bitcoin holdings and increasing market profile. The S&P 500 is expected to announce its September rebalancing soon, and many believe that Strategy could be included in the index. However, its Bitcoin holdings could complicate this decision, as the index committee may be hesitant to add a company with earnings primarily derived from the volatile mark-to-market accounting of Bitcoin, rather than recurring operating profits.
“While MSTR meets the S&P 500’s positive earnings requirements, the source of those earnings is often unrealized gains from Bitcoin mark-to-market accounting,” Palmer said. This could cause the committee to hesitate on adding Strategy, especially with recent additions of crypto-related companies like Coinbase and Block.
Strategy’s inclusion in the S&P 500 would be a major milestone for the company, as it would bring greater institutional exposure to its stock. However, the committee’s decision will likely weigh heavily on the volatility of Bitcoin and how that affects Strategy’s earnings.
