Design and Flaws of the Price Stabilization Mechanism
On June 27, Farside Investors published an analysis of Strategy’s (MSTR) preferred stock STRC, arguing that the so-called price stabilization mechanism is fundamentally unstable. The product was issued at $100 with a design that would push the price toward $100: if STRC falls below $100, the company can increase dividends to raise the price; if above $100, it can lower dividends to depress it. However, the mechanism relies on discretionary company action rather than an automatic system. The analysts emphasize that if investors perceive rising credit risk for Strategy, the STRC price should decline, and if the company then raises the dividend rate, it could further weaken its credit profile, creating a 'death spiral.' STRC is currently trading at about $75, roughly 25% below the $100 target, yet the company has not responded by raising the coupon, indicating the mechanism is largely ineffective.
Valuation Controversy of STRC
From a fundamental financial logic perspective, Strategy issuing a perpetual instrument at an 11.5% yield and using the proceeds to buy Bitcoin represents a poor trade. Even if Bitcoin achieves a long-term average annual gain of 10% plus 5% inflation, Bitcoin might still be very successful but may not cover the 11.5% annual cost. If Bitcoin experiences periodic drawdowns, the company may have to sell BTC at low prices to pay interest, resulting in net losses.
The report further estimates STRC’s theoretical value. Assuming the coupon remains at 11.5%, with an 8% discount rate, fair value is $144—well above the $100 issuance price. Under this assumption, issuing STRC is a bad deal for Strategy but investing in it could be good. However, STRC is not a fixed-rate perpetual; Strategy has the right to reduce the coupon by 25 basis points each month down to the SOFR rate (currently about 3.6%). Considering this right, STRC’s estimated value falls to approximately $55. The current price of $75 reflects neither the $144 premium under a fixed 11.5% coupon nor the $55 value under a full SOFR adjustment, leaving the market in a state of uncertainty.
Possible Solutions and Market Expectations
Farside Investors believes Strategy’s most likely short-term action is to maintain the 11.5% coupon and delay addressing the STRC discount, funding dividends through new equity issuance or Bitcoin sales. However, this only postpones the problem. To truly resolve the issue, the company has two realistic options: begin repurchasing STRC, or abandon the price stabilization mechanism entirely and lower the coupon to SOFR. The analysts consider a buyback the most probable outcome, though it may take time for the company to capitulate and face reality. The market is watching closely for any signal of action that would restore confidence in STRC’s price stability mechanism.