S&P has given Strategy a "junk" rating. Why do analysts expect the share price to double?
The assignment of a speculative rating could open up new sources of capital for Strategy
S&P Global Ratings, one of the "Big Three" rating agencies, assigned Strategy an issuer credit rating of "B-", thus placing the securities of the largest corporate bitcoin owner in the "junk" category. Despite the speculative rating, investment bank TD Cowen reiterated its recommendation to buy Strategy's shares and a target price twice as high as the current one.
Details
S&P pointed out that Strategy's balance sheet is overwhelmingly dependent on bitcoin, and the company's low dollar liquidity and negative equity, as measured by its inherent risks, outweighed positive factors such as its stable access to capital markets and prudent debt strategy.
The rating agency emphasized that Strategy's bitcoin assets create a "currency mismatch": the company's debt and dividends are paid in dollars, while its assets are mostly denominated in bitcoins. "We believe there is a risk of the maturity of the convertible debt coinciding with a period of severe bitcoin market stress. This could force the company to liquidate its bitcoin assets at undervalued prices or enter into a restructuring of its debt or preferred stock, which we would treat as a default," S&P said.
The agency warned that it could downgrade Strategy if bitcoin prices fall or the company's access to capital markets weakens. To raise the rating, it would need more cash liquidity to cover risks and prove that investors will continue to trust it even if bitcoin prices fall, the agency said.
What the analysts are saying
"The company is able to service its debt in the current environment but is vulnerable to [market] shocks," Matthew Siegel, head of digital asset research at VanEck, commented on Strategy's "junk" credit rating. In August, S&P assigned the same "B-" rating to steblecoin issuer Sky Protocol (formerly MakerDAO), also finding it susceptible to liquidity and market volatility shocks.
The speculative rating has an upside: it gives Strategy access to new sources of capital - in particular, credit funds interested in high-risk, high-yield debt, Yahoo Finance notes.
Despite the junk rating, investment bank TD Cowen reiterated a Buy recommendation and $620 target price for Strategy's shares - double the securities' closing price on Oct. 27, The Block reports. According to TD Cowen analysts Lance Vitanza and Jonathan Navarrete, the largest cryptocurrency treasury continues to "convert the market's appetite for volatility and yield into bitcoins," with the number of tokens per share growing amid a slowdown in issuance rates. In their view, bitcoin's integration into the mainstream - from large banks' collateral programs to a friendlier tone from the Fed - remains a factor favoring Strategy.
Wall Street's consensus target suggests that Strategy shares have a potential upside of 86%, MarketWatch shows. The vast majority of analysts - 16 out of 18 - recommend buying them.
This article was AI-translated and verified by a human editor
