Why STRC's Price Stability Mechanism Has Failed
According to Farside Investors' analysis, Strategy's (MSTR) preferred stock STRC was designed with a so-called price stability mechanism aimed at maintaining the $100 issuance price. The mechanism works by increasing dividends if STRC falls below $100 and decreasing dividends if it rises above $100. However, this mechanism is inherently unstable. When investors perceive an increase in Strategy's credit risk, STRC's price should decline, and the company's subsequent dividend hike to boost the price could further weaken its credit profile, creating a 'death spiral.' Moreover, the dividend adjustment is entirely at the company's discretion, not an automatic system, leaving investors facing significant uncertainty. Currently, STRC trades around $75, approximately 25% below the $100 target, yet the company has not responded by raising dividends, indicating the mechanism has largely ceased to function.
Valuation Dilemma: Financial Logic Behind STRC
From a basic financial logic standpoint, Strategy issuing a perpetual instrument yielding 11.5% to purchase Bitcoin is a poor trade. Even if Bitcoin's long-term average annual return reaches 10%, combined with 5% long-term inflation, Bitcoin could still be very successful but may not necessarily cover the 11.5% annualized cost. If Bitcoin experiences a temporary downturn, the company might need to sell BTC at low prices to pay interest, resulting in net losses. Assuming STRC's coupon remains at 11.5%, discounted at 8%, the fair value is $144, significantly above the $100 issuance price—making STRC issuance a bad deal for Strategy but potentially a good investment for buyers. However, STRC is not a fixed-rate perpetual bond: Strategy has the right to reduce the coupon by 25 basis points each month until it reaches the SOFR rate (currently ~3.6%). Considering this right, STRC's estimated value falls to about $55. The current price of $75 deviates from both valuation anchors, and there is no clear reason for it to return to $100.
Strategy's Short-Term Choices and the Likelihood of Buyback
Facing the STRC discount, Strategy's most probable short-term choice is to maintain the 11.5% coupon and defer addressing the discount, funding interest payments through new equity issuance or Bitcoin sales. However, this only postpones the problem. Farside argues that the real solutions are two: either start repurchasing STRC, or completely abandon the price stability mechanism and lower the coupon to SOFR. A buyback of STRC is the most likely outcome, but the company may need some time to yield to market pressure and face reality.