Strategy, the bitcoin-hoarding company led by Chairman Michael Saylor, is caught in a math trap of its own making.
Saylor has trained investors to believe Strategy’s model for acquiring bitcoins would work so long as the market valued the company at a premium to the value of its bitcoin holdings. Effectively, the company’s overvalued stock became a currency to buy bitcoin.
Strategy even created a bespoke metric called mNAV to track the premium. It did so while building a bitcoin stash worth more than $50 billion financed with sales of equity and debt securities.
The problem that came to a head recently is the metric began showing the market was valuing Strategy at a discount to the value of its bitcoins. The roll-up strategy was starting to come undone, and roll-ups typically don’t work well in reverse.
Adding to the strain: The metric is artificially inflated because it ignores sharp declines in the value of some of the company’s securities. Although the metric is essentially a made-up measure, it matters for Strategy investors and the crypto market.
By Strategy’s own logic, if the metric is at a discount instead of a premium, the company should be selling some bitcoin to buy back its own securities. Investors are watching warily for any sign that Strategy might start doing so in large numbers.
The stakes are high. Strategy’s holdings represent 4% of the total bitcoins that will ever exist. Selling some could drag bitcoin’s already battered price down further, along with Strategy’s stock. A small sale by Strategy in May had that effect, even though it sold just 32 bitcoins for $2.5 million.
That is why Strategy investors watch mNAV. So what is it?
Strategy says mNAV shows its enterprise value as a multiple of its bitcoin holdings, and it used to regularly show a steep premium to its bitcoin. In its heyday, this allowed Strategy to regularly sell stock to buy more bitcoin. It acted like a traditional roll-up company using inflated shares as currency to fund an acquisition spree.
For now, that game is over. Strategy’s stock is down 75% over the past year. And the mNAV has dropped precipitously, falling below 1 last month.
That set the stage for Strategy’s announcement last Monday that it would abandon its hold-on-for-dear-life philosophy. It said its board had authorized selling up to $1.25 billion of its bitcoin to buy back shares and cover interest payments and preferred-stock dividends.
But Strategy’s predicament is worse than it appears. The mNAV metric has a flaw that has grown acute as the prices of Strategy’s bonds and preferred shares have tanked along with its stock.
To calculate enterprise value, Strategy adds the market value of its common stock to the principal amount of its debt and the par value of its preferred stock, then subtracts cash. Normally, that formula works fine, if the debt and preferred shares are trading at or near par.
The problem now is that mNAV overstates Strategy’s enterprise value—the ratio’s numerator—by using the face value of its debt and preferred stock rather than their market value. That makes the metric artificially high. It also defeats the purpose of showing the extent to which the market is valuing Strategy at a premium or discount.
On June 26, when Strategy said the mNAV was just under 0.99, it would have been 0.89 using the market value for its debt and preferred stock.
For enterprise value, Strategy included $6.75 billion of debt and $15.46 billion of preferred stock. Those were par values, not market values. At the time, Strategy’s debt was trading at a 7% discount, and its various series of preferred shares, combined, were trading for a 28% discount.
Since then, mNAV has rebounded along with Strategy’s share price. As of 4 p.m. Thursday, Strategy’s website showed mNAV as 1.09. But it would have been 1.04 using market values for its debt and preferred stock, only a slight premium.
To stanch the bleeding, Strategy on June 29 raised the dividend on its biggest preferred series, called STRC or “Stretch,” to 12%. It hoped to lure buyers and lift the price closer to par value.
The move revealed that Strategy cares deeply about its preferred shares’ market prices, despite not using them in the mNAV metric that it spotlights for investors.
The company estimates its $2.55 billion cash buffer buys it about a 17-month cushion to pay interest and preferred dividends without selling its crypto. But if the market starts valuing Strategy at a discount again, and it sticks, Strategy faces the prospect of running out of cash and having no choice but to tap its bitcoin stash.
Strategy might have bought itself some time. There’s no telling how much it has left.
Write to Jonathan Weil at jonathan.weil@wsj.com
