Summary While Strategy's common stock has been cut in half in a little over a month, the preferred stocks are now joining the common in free fall. The preferred shares all trading at a discount to par likely limit Strategy's ability to use those products for continued BTC purchases. Worse than that, Strategy likely has about $80 million in cash and roughly $150 million in dividend obligations due before the end of the year. The market seems to be daring the company to sell Bitcoin. I suspect it will simply keep diluting the common instead. Shares of Strategy ( MSTR ) have been in freefall since early October . MSTR falling in price is not something that I'm particularly surprised by given the declines in Bitcoin ( BTC-USD ). I've been stressing caution through my MSTR coverage on Seeking Alpha for well over a year. Perhaps more important than the MSTR declines, Strategy's preferred stocks ( STRK )( STRF )( STRD )( STRC ) are now also collapsing. This directly challenges my prior thinking, and in this update, I'll detail why I think the market has lost confidence in Strategy's Bitcoin flywheel. The Preferred Stocks Are Unraveling Strategy Stocks (Seeking Alpha) As of writing, each of Strategy's preferred stocks is down significantly during intraday trading. These stocks are down between 3% and 8%. For income investments, these are absolutely massive moves. In recent months, I've made the case for why I felt one of Strategy's income-based products could conceivably do well when Bitcoin's price went down. In reality, the opposite has been true, and I'm now forced to reassess my thinking. While I have not been bullish on either the STRK or STRD shares in the past, I have been bullish on the STRF shares. To be clear, I do still hold STRF shares. But I also see some serious problems that I think warrant trimming that position. First, STRD and STRK are now trading below IPO price. Beyond that, STRF has fallen below $100 per share for the first time since June and is currently at its lowest price level since May. What this means is that every single dollar-based preferred stock that Strategy offers is currently trading below par. Since MSTR shares are also trading at a sizable discount to mNAV, it puts Strategy in a very precarious position with limited options as the company's December dividend payment due date quickly approaches. The Problem For those who have followed either my work or the stock itself, this shouldn't be a surprise. Strategy does not actually generate positive income from operating its software business. We have to strip out gains or losses on digital assets that were purchased years prior to get a real assessment of the company's software business operations. On a trailing twelve-month basis, Strategy's adjusted operating loss is over $42 million: Millions Q3-24 Q4-24 Q1-25 Q2-25 Q3-25 Revenue $116.1 $120.7 $111.1 $114.5 $128.7 Cost of Revenue $34.3 $34.2 $34.0 $35.8 $38.0 SG&A $68.9 $72.4 $68.1 $70.2 $68.1 R&D $33.3 $25.7 $24.4 $24.1 $22.6 Operating Income -$20.4 -$11.6 -$15.4 -$15.6 $0.0 Source: Seeking Alpha The only reason Strategy has been able to buy Bitcoin to the degree that it has is due to the company's ability to raise capital through various instruments, including convertible notes, preferred stocks, and good old-fashioned common stock dilution. Raising money to buy BTC was easy when MSTR traded at a significant premium to mNAV. BTC buys vs MSTR mNAV (Strategy & BitcoinTreasuries, Analyst's Chart) That is no longer the case, and we can see in the chart above how weekly acquisitions have fallen in line with MSTR mNAV compression. Anecdotally, it is quite obvious that MSTR shareholder appetite for more dilution of the common is virtually gone, judging by sentiment online. But it's important to keep in mind that 89% of the Bitcoin purchase capital raised since preferred stock ATMs launched in March has actually come from the common ATM. Strategy can just switch to issuing more preferred stock through ATMs then? Maybe not, actually. To illustrate why, let's look at one of Strategy's recent Bitcoin acquisition filings: November 10th Filing (Strategy) I've crudely circled the nominal value versus net proceeds for each of the four preferred ATM raises during the week of November 3rd. Strategy was really only able to utilize STRF and STRC because those were the two products that it could use to generate greater proceeds from the stock issuance than the nominal value of the obligation it was creating. That was not the case for STRK or STRD, which is why those raises were so much smaller by comparison. The point is, Strategy does not want to issue $6.4 million in preferred stocks to generate just $5.5 million in proceeds. It would much rather do the opposite. Now it can't. At the end of September, Strategy had $54.3 million in cash and equivalents. Since then, the company has raised about $318 million through its ATM programs and purchased almost $292 million in BTC with that capital. That leaves, at best, $80 million or so in cash to pay out nearly $150 million in dividend obligations before the end of the year. Preferred Class Shares Dividend/Shr Divis Due EOY STRK (Due Dec) 13,974,912 $2.00 $27,949,824 STRF (Due Dec) 12,676,383 $2.50 $31,690,958 STRD (Due Dec) 12,344,308 $3.06 $37,724,205 STRC (Due Nov+Dec) 29,587,063 $0.88 $51,777,360 Total Dividends Due by EOY $149,142,347 Source: Strategy, Analyst's Calculations, estimated dividend payments To be sure, Strategy could simply not pay the STRD dividends in December, though I suspect doing so would irreparably damage the company's ability to continue raising capital should it wish to continue doing so in the future. But even if it doesn't pay STRD shareholders in December, the company would still have a dividend shortfall through the other three products. Strategy's Next Move There are a variety of ways Executive Chairman Michael Saylor and company could play the precarious situation that Strategy now finds itself in. But I think these three are the most straight forward: Keep raising capital through preferred stocks Sell Bitcoin to pay dividends Continue diluting common stock holders I think option 1 is unlikely due to what I just laid out in the section above. Strategy cannot tap the preferred ATMs while all four of them are under par without severely damaging trust in his income products, in my opinion. However, if STRF recovers from current levels and retakes par, we could see Strategy begin to lean on that instrument a bit more despite its relatively small ATM. Option 2 is also unlikely because it goes counter to what Saylor has been saying for years. The time to sell BTC to pay the dividends was a month ago when Bitcoin was well over $110 per coin. Given the weakness in the market, Strategy selling BTC could trigger a deeper cascade lower in the asset. Which would result in bigger problems for the company. Option 3 seems like the easiest 'kick the can down the road' path. Thus, it seems to me to be the most likely. Closing Summary Again, I have to stress that Strategy had already been heavily relying on MSTR dilution to fund purchases to this point. Given the market dynamics currently on display in the preferred stocks, Strategy's ability to raise through its income products going forward is likely minimal. Frankly, I think the market is actually daring the company to sell Bitcoin to pay its preferred obligations in December. Furthermore, at a basic mNAV of 0.9, one could argue it behooves the company to sell Bitcoin to buy back its common stock to close its own mNAV discount. While I highly doubt buying back MSTR is something the company is considering doing, I have to imagine there is at least some internal discussion about buying back some of the preferred stocks while they're under par to minimize the company's perpetual dividend obligations. I could certainly be wrong for being bullish on STRF earlier this year. But I don't think I'm going to be wrong on continuing to avoid MSTR.
