MicroStrategy Downgraded to Sell by Monness as Bitcoin Strategy Faces Limits

Monness, a prominent financial research firm, has downgraded MicroStrategy Incorporated (MSTR) stock from Hold to Sell. The firm's analysts have expressed concerns that the company's strategy of issuing convertible notes to fund its Bitcoin acquisitions may have reached its limit. This change in outlook comes as MicroStrategy continues to invest heavily in Bitcoin, using convertible notes as a means to raise capital without diluting existing shareholders.

The bearish turn by Monness is based on the belief that the convertible issuance strategy, which has been a key component of MicroStrategy's funding for its Bitcoin purchases, is likely exhausted. This strategy involves issuing convertible notes that can be converted into equity at a later date, providing the company with immediate capital while deferring the dilution of shares. However, the analysts at Monness suggest that this approach may no longer be viable, given the significant amount of debt MicroStrategy has already taken on.

MicroStrategy's aggressive Bitcoin acquisition strategy has been a double-edged sword. On one hand, it has positioned the company as a leader in the corporate adoption of cryptocurrencies. On the other hand, it has also led to a substantial increase in the company's debt levels. The company has raised billions of dollars through convertible notes to fund its Bitcoin purchases, but this strategy has its limitations. As the company continues to acquire more Bitcoin, the risk of further debt accumulation increases, which could negatively impact its financial health.

Monness analyst Gustavo Gala has become the first bear for MSTR stock. Gala believes that the company’s strategy to sell equity and debt securities so that it can buy Bitcoin seems to have played out, given that investor response to recent issues has been “less than stellar.” Gala added that the market appears to be a bit saturated, implying that it could cost more for Strategy to raise funds to purchase Bitcoin. Further, he thinks that the dismal market interest in Strategy’s preferred securities indicates the limits to the Bitcoin treasury company’s aspirations.

The analyst highlighted that Strategy has already used $18.6 billion of its $21 billion common share ATM (at-the-money) offering. Plus, it raised another $711 million last week through STRF, its second series of preferred stock. The analyst argued that it will become even more challenging for the company to raise capital via share issuance to buy Bitcoin, which would push it towards fixed-income securities.

Unlike Gala, other analysts are bullish on Strategy stock, with a Strong Buy consensus rating based on 12 Buys against just one Sell recommendation. The average MSTR stock price target of $513.85 implies about 68% upside potential. MSTR stock has rallied 87% over the past year.