76report

May 16, 2025

Ordering from the Strategy Menu

If you had purchased $1,000 worth of Strategy (MSTR) stock on June 30, 2020—back when the software company Michael Saylor founded was known as MicroStrategy and shortly before the company announced its transition to the Bitcoin standard—the investment would now be worth more than $34,000.

MSTR has essentially outperformed every stock out there over the past five years, crushing even NVIDIA (NVDA). A $1,000 investment in NVDA over the same time frame would have left an investor with “only” around $14,000.

MSTR’s eye-popping performance practically compels investors to develop an understanding of what is going on with this company and where it is headed.

In the first part of Rise of the Bitcoin Treasury Company, we focused on the rapidly growing list of public companies that were created to own Bitcoin. Bitcoin Treasury Companies are businesses that have the principal objective of creating value for shareholders through the accumulation of Bitcoin on the balance sheet.

In this second part of the report, we take a hard look at the pros and cons of the three publicly traded stocks that Strategy has now issued.

There is the original common stock which has performed so well and continues to trade with the ticker MSTR.

Earlier this year, Strategy issued two more equity securities to the public with the tickers STRK and STRF. The company refers to them as Strike and Strife.

We first wrote about STRK back in March and encourage subscribers to refer to that report. STRK is the ticker for Strategy’s 8.00% Series A Perpetual Strike Preferred Stock.

High Yield with Bitcoin Upside (3/18/2025)

STRF came to market shortly after that note was published. STRF is Strategy’s 10.00% Series A Perpetual Strife Preferred Stock.

The key difference between STRK and STRF is that STRK can be converted into MSTR common equity, whereas STRF is purely a fixed income instrument.

High yield plays courtesy of AI

Strategy is an innovative company in many ways. In a recent interview at the Strategy World conference, Saylor described STRK and STRF as “the first AI designed securities.”

These securities do in fact offer a blend of features that is original. Saylor explained that he spent hours iterating back and forth with OpenAI’s Deep Research tool in order to figure out a way to create these unique instruments.

The point he made was that if he had simply told a group of legal and financial professionals that he wanted to create a brand new type of investment that was novel in so many ways, they would likely just say it is impossible.

So the burden was on him (with the help of AI cranking through case law and precedent) to figure out a viable path forward and refine his ideas to the point where the professionals could make it happen.

So a lot of our innovative capital markets activity, things like STRF, things like STRK, we had to fight through all sorts of complicated legal issues, complicated financial issues. You know, we did a convertible preferred stock. It had never been done before…. We made it a perpetual dividend good for a thousand years. It had never been done before. We created a perpetual call option…. I can say, you know, with a high degree of confidence… a lot of the things we've done in the capital markets, we just couldn't have done that [without AI]. - Michael Saylor (5/6/2025)

MSTR vs. STRK vs. STRF

Investors who want exposure to the success of Strategy as a Bitcoin Treasury Company now have three different tickers to consider.

MSTR is the common stock. It is by far the most volatile of the three securities, because it purely represents the equity value of the business.

As we write, MSTR’s historical volatility (over the past 30 days) is above 90%. For perspective, a tech company like Microsoft (MSFT) had volatility below 40% in the same time frame.

MSTR is volatile because the business is based on Bitcoin, which itself is highly volatile (around 50% over the past 30 days). Strategy also has corporate debt, mostly in the form of convertible bonds, which amplifies the volatility of the stock.

As we discussed in Part I with the concept of mNAV, MSTR also trades at a premium to its underlying Bitcoin holdings. So, on top of fluctuations in the price of Bitcoin, MSTR takes on additional volatility because the mNAV itself fluctuates.

mNAV is the multiple of the stock relative to underlying Bitcoin value. The higher the mNAV gets, the greater these fluctuations can become.

This dynamic is similar to how growth stocks that trade at high earnings multiples tend to be more volatile than more mundane value stocks that trade at low multiples. The richer the valuation, the more a stock tends to wobble.

Why buy MSTR?

Volatility, as Saylor often points out, is actually a reason that an investor might buy shares of MSTR. Among the three options, the common shares of the company give investors the most potential upside if Saylor and his team continue to be successful.

There are basically three drivers of performance for MSTR common shares.

(1) Bitcoin price appreciation.

Although MSTR is not perfectly correlated with Bitcoin, the company’s Bitcoin holdings are the foundation of its value. The shares tend to rise as Bitcoin rises (with leverage amplifying these moves).

(2) Accretive Bitcoin purchases.

It’s not just that the price of Bitcoin has trended up. One of the main reasons MSTR has performed so well is that the company has successfully issued stock (at a premium) along with debt to buy more Bitcoin along the way, which has improved returns.

(3) mNAV expansion

Another key driver of MSTR’s success, especially since early 2024, is that the premium to its Bitcoin holdings has expanded. Roughly speaking, the mNAV has basically gone from 1 (no premium) to 2 (where it currently resides). If the mNAV doubles, the share price doubles.

What goes up can go down

Volatility is, of course, a two-way street. All of these factors can move in the wrong direction and send MSTR shares plunging.

Although MSTR at around $400 per share is now closer to all-time highs, just within the past six months, MSTR shares had fallen from a November 2024 peak of $474 to an April 2025 low of $238—a 50% slide.

MSTR Share Price

(Last 6 Months)

An investment in MSTR is clearly not well-suited for an individual with low risk tolerance.

But if you believe that Bitcoin still has vast upside potential and that MSTR, through accretive Bitcoin purchases and/or mNAV expansion, could outperform Bitcoin, the volatility and downside risk potential may seem worth it.

The preferred stock alternative

Given the extreme volatility, many investors may not be comfortable making a sizable investment in MSTR.

Some investors may be prepared to commit a certain amount of capital to MSTR—perhaps just to have exposure to the “blue sky” scenario of extreme Bitcoin upside—but want to limit potential losses.

STRK and STRF were devised by Saylor, with a little help from AI, to provide an alternative for these investors.

The common element of both is a credit or fixed income component. Neither of these securities are bonds, technically speaking. They are both considered preferred stock.

The main reason these securities have value is that they represent a promise to pay a fixed dividend, on a quarterly basis, perpetually into the future. Unlike most bonds, there is no principal payment at the end (although there are limited scenarios where the shares could be called).

In the case of STRK, investors can expect $8.00 of annual dividends, payable quarterly. In the case of STRF, they can expect $10.00.

The board of Strategy must declare these dividends and could choose not to do so, or in certain circumstances pay the dividend in the form of MSTR shares (with the quantity of shares based on recent trading levels). However, unpaid dividends accumulate and eventually must be paid with the proceeds from any future equity issuances.

No company is interested in defaulting on its debt or preferred stock obligations, even if it might have some legal flexibility to delay payments.

In practice, we believe investors should expect to receive dividends from both STRK and STRF so long as Strategy is financially capable of making these payments.

Collateral is key

Whereas the value of MSTR lies primarily in its long-term upside potential, the value of STRK and STRF lies primarily in the asset value that resides within the company, specifically the Bitcoin holdings.

One way to think of these investments is as if they are loans one might make to an individual who has a lot of money in the bank but does not have a job or another source of income.

Strategy’s ability to pay back these loans (i.e., meet its dividend obligations) is entirely dependent on its ability to raise cash from its Bitcoin holdings, either by selling more securities or, worst comes to worst, selling Bitcoin.

If you were lending money to an unemployed but wealthy individual, the first question you would ask is how much money does he have. If he had $1 million in the bank, you might even feel comfortable lending him up to $1 million.

The difference with Strategy is that the money is not in the bank, but it is in Bitcoin, which is much more volatile. Strategy currently holds nearly 570,000 Bitcoin with a total value (assuming a Bitcoin price of $100,000) around $57 billion.

Balancing leverage and volatility

Because Bitcoin is highly volatile, it is not reasonable to expect investors to lend money to Strategy up to the current amount of Bitcoin that it owns.

What if Bitcoin goes down 10% or 20% tomorrow? How will they be paid back?

But it is reasonable to expect investors to lend Strategy money up to a fraction of the Bitcoin holdings. Of course, investors also need to receive an attractive interest rate that compensates them for the risk of the collateral possibly shrinking in a substantial way.

This is the logic that Saylor and his team apply to STRK and STRF.

Currently, all forms of debt at Strategy (convertible bonds and preferred stock) represent less than 10% of MSTR’s market cap and less than 20% of its Bitcoin holdings.

STRK is an At-The-Market (ATM) security offering, which means the company has the flexibility to sell more STRK shares to the public on a continuous basis. The long-term target is to raise up to $21 billion.

Strategy has also indicated an intention to make STRF an ATM offering with similar size.

Very importantly, Saylor has indicated that he will maintain an upper bound of 20% to 30% of total Bitcoin value in terms of how high the total amount of debt can rise.

So he has promised the market he will always try to maintain a large cushion, just in case Bitcoin falls very sharply.

Should Strategy be investment grade?

Strategy does not currently have a credit rating. When the company borrows money, it has to pay a relatively high interest rate (unless it is attaching some form of equity to the bond, as is the case with its convertible bonds).

On the most recent earnings call, Saylor made the argument that Strategy’s debt and preferred stock instruments should actually be considered investment grade because the company is so overcollateralized with Bitcoin.

The mathematical reasoning here is intriguing.

You can take the volatility of Bitcoin and infer from it a probability that the value of the Bitcoin on the balance sheet would fall 70% or more over a given time frame.

That could take the value of the Bitcoin holdings down to the point at which the company has more debt than Bitcoin (like a house being worth less than a mortgage).

On the conference call, Saylor introduced the concept of BTC Rating, which is similar to mNAV. This refers to the total value of Bitcoin owned divided by total debt, or how well covered the debt is by Bitcoin.

Using different volatility assumptions, he presents different scenarios showing the probability of a steep decline in Bitcoin that would leave Strategy “undercollateralized.”

The punchline is that the risk of this happening is generally low single digits, if not less than 1%, which could be consistent with investment grade risk metrics.

Long-term investment grade bonds typically yield about 5.5% these days or approximately 1% more than U.S. Treasuries.

If STRK and STRF were to become viewed as investment grade instruments, they are extremely undervalued.

Saylor indicated that he is now on a mission to “educate” rating agencies and the rest of the investment world as to what he views as the true risk profile of his Bitcoin-backed securities.

Source: Strategy Q1 2025 Earnings Presentation (5/1/2025)

Should you lend money to Saylor?

Michael Saylor is literally an MIT-educated rocket scientist, so we need to be cautious about getting into too much mathematical complexity and losing the plot.

So let’s zoom out.

The bottom line is that Strategy owns a lot of Bitcoin, much more than all of its debt. And Saylor has committed publicly to preserving this cushion of extra Bitcoin, which he likely needs to do or the capital markets will stop trusting him.

The main risk associated with any bond or preferred stock security issued by Strategy is a severe and sustained decline in the price of Bitcoin. You cannot draw blood from a stone.

So long as you are willing to bear this risk, you may be willing to invest in these instruments if the potential return is high enough.

At closing prices on 5/16/2025 of $96.50 and $98.00, the annualized dividend yield on STRK and STRF are currently 8.3% and 10.2% respectively.

This means, so long as these dividends continue to get paid, investors will receive annual cash on cash returns at these levels in perpetuity (although the market value of the shares can fluctuate up or down).

For perspective, these are indeed high yields.

The S&P 500 has returned approximately 10.5% annually over the past 20 years. So the dividend yield on these instruments is quite close to the sort of rate of return one might expect from the stock market over time.

These yields are also at or above the kind of yields currently, and for the most part historically, produced by high yield bonds (also known as non-investment grade or “junk” bonds).

A commonly referenced junk bond index is the ICE BofA Single-B US High Yield Index.

The yield on this index is currently around 7.4%. Over the past decade, the yield on the index has rarely crossed 10% (the March 2020 pandemic crisis being an example).

Junk Bond Yields (Last 10 Years)

STRK or STRF?

If you do not have confidence that Bitcoin will grow or even hold its value over the long-term, or do not have confidence in Strategy to manage its balance sheet effectively, you should probably stop reading at this point (if you have not already).

A severe and sustained Bitcoin crash could wipe out all Strategy securities, perhaps permanently. If you attach a high probability to this outcome, it is time to move on.

Our Income Builder Model Portfolio, by the way, is filled with relatively high yielding stocks that are unrelated to Bitcoin. (Not quite as high as STRK and STRF, with the average divided yield around 4%, but much higher than the the S&P 500 dividend yield, which is now around 1.3%.)

But if you are at least intrigued at the prospect of earning a high dividend yield ad infinitum, the next question is, which one is better, STRK or STRF?

What is the option worth?

There are some structural differences between STRK and STRF, but for the most part they are identical except in one key respect.

STRK shareholders have the option to convert their shares into 0.1 shares of MSTR at any time, whereas STRF has no convertibility.

Shares of STRK are still very much “out of the money,” however. Nobody would buy STRK around $97 per share and convert it into MSTR, which now trades around $400 per share. You would be swapping $97 for $40.

But, at current prices of STRK, if MSTR shares eventually rallied to $970, you would be at the breakeven point. So the possibility of MSTR shares rising beyond this level—and dragging up STRK along with it—gives STRK extra value.

(In finance jargon, the potential to convert STRK shares to MSTR shares is known as an embedded call option.)

Valuing the dividend

We can actually estimate just how much value the market is currently ascribing to the convertibility feature by looking at the relative yield on STRK versus STRF.

By applying the yield on STRF to the $8 dividend payable to STRK shareholders, you can calculate what the share price of STRK would be if shareholders could not convert.

With STRK at $97 and STRF yielding around 10%, this calculation produces a “dividend only” value for STRK around $80 ($8.00/10%). The implied value of the option is therefore the difference between that figure and STRK’s current share price—around $17.

STRK shareholders accept a somewhat lower yield versus STRF because they want exposure to more extreme upside scenarios in MSTR.

Let’s imagine, just to illustrate the principle, that MSTR shares eventually rose tenfold to $4,000. One share of STRK would be convertible into $400 worth of MSTR at that point (while actually still paying its dividend).

Shares of STRK in this example should rise at least 300% to capture the conversion value. This is a fraction of the 900% gain that MSTR shareholders would receive but still considerable.

STRF shareholders, meanwhile, would not directly benefit from the surge in the MSTR share price.

Scenario analysis

For the exclusive use of 76report subscribers, we have built a proprietary model that contains estimates of where we believe the shares of STRK and STRF could trade in the future assuming different trading levels of MSTR.

As recently issued securities, STRK and STRF have limited history but were trading when stocks, including MSTR, bottomed in early April 2025. The relative value at that moment gives us a useful reference point.

As we built this model, we made certain assumptions as to how STRK would likely trade as the main source of its value transitions from dividends to MSTR convertibility the higher MSTR shares go.

We also assume the required yield on the preferred stock dividends declines somewhat as MSTR shares rise in value, which would presumably reflect a scenario where the value of the Bitcoin has risen considerably.

It is worth emphasizing, however, that, just to be conservative, we do not assume yields fall to the level of investment grade metrics.

Estimated price changes are relative to Friday, May 16, 2025 closing prices.

MSTR/STRK/STRF Scenario Analysis

(Source: 76research estimates; FactSet)

KEY TAKEAWAYS

Pros of MSTR

• MSTR shares have by far the highest upside potential.

• In an extreme downside scenario, such as a severe and prolonged collapse of Bitcoin, the common shares are, for the most part, no worse off than STRK or STRF (all securities basically wiped out).

Cons of MSTR

• Highly volatile, with sensitivity to the price of Bitcoin as well as changes in the mNAV.

• Most susceptible to poor performance in a moderately bad scenario for Bitcoin (Bitcoin stagnates or falls and/or MSTR mNAV contracts).

Pros of STRK

• STRK shares have the potential deliver acceptable returns and consistent dividends, or at least limited share price declines, even in a scenario where MSTR shares fall meaningfully.

• As MSTR shares rise to the point where conversion becomes the more valuable path (at or around $1,000), the option value within STRK should appreciate at an accelerated rate.

• STRK would benefit from growing market comfort with Strategy creditworthiness (whether or not Strategy ever formally becomes investment grade).

Cons of STRK

• Less participation in MSTR upside versus common stock ownership.

• Lower yield versus STRF.

• Comparable risk to MSTR in extreme downside scenarios.

• Dividends are taxable (currently uncertain as to whether dividends will be considered “qualified” by the IRS and therefore subjected to favorable rates).

Pros of STRF

• Highest yield.

• Would benefit from growing market comfort with Strategy creditworthiness (whether or not Strategy ever formally becomes investment grade).

Cons of STRF

• No direct participation in MSTR upside scenario (but could benefit indirectly through perception of improved creditworthiness.)

• Comparable risk to MSTR in extreme downside scenarios.

• Dividends are taxable (currently uncertain as to whether dividends will be considered “qualified” by the IRS and thereby subjected to favorable rates).

What to order?

Master Chef Saylor has thoughtfully produced a range of options for investors across the risk and income spectrum.

STRK and STRF may become the primary tools by which Saylor obtains leverage for Strategy, which is why he designed them to have so many appealing attributes for investors. The more demand these instruments generate, the more he can sell.

We see merit in all of these securities, with the understanding that they provide significantly different risk/reward profiles and sensitivities to different scenarios. Nothing prohibits investors from owning a mixture of these securities, by the way.

The investment decision largely depends on risk appetite and which scenarios an individual investor finds most plausible.

We do continue to see STRK as offering a rather compelling combination of high yield, moderate downside risk relative to MSTR, and meaningful participation in potential MSTR upside.

STRK is a nice alternative for investors who may not be prepared to commit substantial capital to a security as volatile and uncertain as MSTR… but who believe in the long-term durability of Bitcoin and also would like meaningful exposure to a scenario where MSTR continues to perform extremely well.

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