Design Flaws of the STRC Price Stabilization Mechanism
On June 27, Farside Investors published an analysis stating that Strategy's (MSTR) preferred stock STRC has a price stabilization mechanism that is inherently unstable. The product was issued at $100 with a mechanism designed to push the price toward $100: if the price falls below $100, the company can increase dividends to raise the price; if above $100, it can lower dividends to suppress the price. However, this mechanism has a fundamental flaw—when investors perceive rising credit risk for Strategy, the STRC price should decline, but if the company responds by raising dividend rates, it may further weaken its credit standing, creating a "death spiral." Additionally, the coupon rate is determined at the company's discretion, not an automatic adjustment system, leaving investors with significant uncertainty when evaluating STRC.
Financial Logic of STRC's Valuation Paradox
According to the analysis, from a basic financial logic perspective, Strategy's issuance of a perpetual instrument at an 11.5% yield to fund Bitcoin purchases is a poor trade. Even if Bitcoin achieves a long-term average annual return of 10% plus 5% inflation, Bitcoin could still be very successful but may not cover the 11.5% annualized cost. If Bitcoin's price declines, the company may need to sell BTC at low prices to pay interest, resulting in net losses. Assuming the STRC coupon stays at 11.5%, discounted at 8%, the fair value would be $144, significantly above the $100 issue price—making the issuance bad for Strategy but potentially good for investors. However, Strategy has the right to reduce the coupon by 25 basis points each month down to the SOFR rate (currently around 3.6%). Considering this right, STRC's estimated value drops to roughly $55.
Current Challenges and Potential Solutions
STRC currently trades at about $75, approximately 25% below the $100 target. The price stabilization mechanism has not been activated, and the company has not responded by raising the coupon. This means the mechanism has largely failed, and there is no clear reason for STRC to return to $100. If the market expects Strategy to gradually reduce the coupon to SOFR, STRC should approach $55. Strategy's most likely short-term choice is to maintain the 11.5% coupon and not address the discount for now, funding dividend payments through new stock issuance or Bitcoin sales. However, this merely postpones the problem. To truly resolve the issue, the realistic options are either to begin repurchasing STRC or to completely abandon the price stabilization mechanism and cut the coupon to SOFR. The analyst believes a STRC buyback is the most probable outcome, though it may take time for the company to yield to pressure and face reality.