Strategy (MSTR) Navigates Bitcoin Volatility: Q3 Earnings and Future Outlook

Strategy (MSTR), the prominent institutional investor in Bitcoin, has released its third-quarter financial results, revealing a significant 72% decline in net profit to $2.8 billion. This marks a substantial retreat from the record $10 billion peak achieved in the preceding quarter. The company’s valuation premium has also contracted, reaching its lowest point in nearly 18 months, as the summer’s Bitcoin rally lost momentum.

Despite the sharp drop in net profit, Strategy’s Q3 performance still managed to surpass market expectations. The company reported diluted earnings per share (EPS) of $8.42, slightly exceeding analysts’ consensus estimates of $8.15. However, this quarter represents Strategy’s weakest financial showing since it adopted fair value accounting principles in January of this year.

Market Reaction and Bitcoin’s Impact

Prior to the earnings announcement, Strategy’s stock price closed at approximately $254, a six-month low. Following the release of the Q3 report, the stock saw a positive reaction, climbing approximately 4% in after-hours trading. This rebound occurred even as Bitcoin, the cornerstone of Strategy’s investment thesis, experienced a pullback. At the time of writing, Bitcoin was trading at $109,154, a 13.5% decrease from its early October all-time high.

The fluctuating price of Bitcoin directly impacts Strategy’s valuation metrics. The company’s market value relative to net asset value (mNAV) – a crucial indicator that measures Strategy’s market capitalization (including debt) against the value of its cryptocurrency holdings – has fallen to roughly 1.2 times. This figure represents the lowest mNAV ratio recorded since March 2023.

For context, Strategy’s mNAV soared to an impressive 3.9 times in November of the previous year. This surge coincided with a period of significant market optimism, fueled by the U.S. election results, a robust rally in U.S. equities, and Bitcoin’s dramatic ascent from $70,000 to $100,000, which collectively propelled Strategy’s valuation to unprecedented heights.

Strategic Bitcoin Accumulation and Funding

As the world’s largest corporate holder of Bitcoin, Strategy continued its accumulation strategy in Q3, adding 43,000 Bitcoins to its reserves. While substantial, this acquisition pace is notably slower compared to the 69,000 Bitcoins purchased in Q2 and over 80,000 in Q1, marking the weakest quarter for Bitcoin acquisitions this year. Market observers generally attribute this deceleration to the softening mNAV premium.

Strategy has consistently employed innovative financing mechanisms to fund its Bitcoin acquisitions without diluting common equity. The company utilizes a series of high-yield preferred shares (traded under tickers like STRC, STRF, STRK, and STRD), which offer either fixed or floating dividends and trade independently of the common stock market.

Reinforcing this strategy, Strategy announced an increase in the dividend for its floating-rate preferred stock, STRC, to 10.5% for November, up slightly from 10.25% in the previous month. This approach allows Strategy to attract investors with attractive yields, with dividends primarily funded by the continuous issuance of new preferred shares and equity, rather than relying on operational cash flow. This ingenious strategy ensures the company can maintain its Bitcoin accumulation, even during periods of weaker stock performance and tighter valuation premiums.

Bold Outlook and Shareholder Confidence

Looking ahead, Strategy remains highly optimistic about its Bitcoin-centric strategy. The company reported a year-to-date “Bitcoin Yield” of 26% and reaffirmed its target of a 30% full-year yield. Furthermore, Strategy projects an ambitious full-year net profit of $24 billion and an EPS potentially reaching $80. This bold forecast is predicated on Bitcoin reaching $150,000, underscoring the company’s strong conviction in the cryptocurrency’s future trajectory.

Addressing previous shareholder concerns, Strategy has also reinstated its guidance regarding “at-the-market” (ATM) common stock issuance. The company has committed not to sell common stock when its mNAV multiple falls below 2.5 times, a policy that had been temporarily withdrawn earlier this year.

This long-term vision aligns with the pronouncements of figures like Michael Saylor, who has famously predicted Bitcoin could reach $150,000 by year-end and potentially soar to $20 million within two decades, highlighting the immense potential perceived by major players in the digital asset space.