Strategy shares fell after analyst forecast: what spooked the market?

Shares of software company and the largest corporate bitcoin holder Strategy (formerly MicroStrategy) fell more than 2% in trading on August 21 after the publication of a research note. Expert Gus Gala of Monness, Crespi, Hardt set a target price on the company's securities almost half below the current level of $338 and reiterated a "sell" recommendation. Over the last month, the company lost almost 20% of its value amid a broad market correction.

Shares of Strategy Michael Saylor, one of the most prominent cryptocurrency enthusiasts, slipped 2.4% in trading on Aug. 21 on the publication of an analyst note by Gus Gal of investment firm Monness, Crespi, Hardt, writes Motley Fool.

The expert reiterated a "sell" recommendation on Strategy's shares with a target price of $175 - almost twice lower than their current level of about $338. Among the reasons for this decision, the analyst pointed out the high volatility of Strategy's securities and the cyclicality of bitcoin. According to him, the shares remain under pressure and the downtrend is likely to continue, Barron's notes.

The company gained attention when it became the largest corporate holder of bitcoin. It now has more than 600,000 bitcoins on its balance sheet.

At the premarket on Friday, August 22, Strategy's shares rebounded slightly with a 0.2% gain. Over the past month, they have fallen almost 20%, while the value of bitcoin has fallen by only 3.5%.

Despite the sell-off, Strategy's securities have already added more than 140% over the year thanks to bitcoin's rise above $120,000. However, Gala warns that the high volatility of the cryptocurrency carries serious risks, Barron's says.

Bitcoin is susceptible not only to growth, but also to sudden collapses. This, according to Gus Gal, is what makes the investment extremely risky. "We continue to believe that bitcoin treasury companies are a sign of the late stage of bitcoin's bull cycle," says the analyst(quoted in Barron's).

For Strategy stock to go against this scenario, bitcoin needs to break out of its historical boom-and-bust pattern and continue a prolonged rally, Gala says.

In some periods, Strategy's capitalization has been more than twice the value of the bitcoin it actually holds, the analyst adds. Now the premium is 1.34 to 1, meaning the market price of the stock values the company at 34% more than its BTC stock is worth.

According to Gala, investors should not build up short positions (play down), but it is also risky to hold the stock long-term (long). He predicts that this ratio will decline, also due to the credit markets' skepticism about the debt that the company issued to finance BTC purchases.

Gala also doubts that rating agencies will agree to give Strategy an investment rating in the foreseeable future. The reason is that the company's profits mainly consist of unrealized bitcoin revaluation.

An investment rating would allow Strategy to issue and service debt on more favorable terms, but for this to happen, bitcoin would have to be perceived by the market as a more stable asset - analogous to digital gold, the analyst concludes.

Bitcoin is now consolidating in the $112,500 range, Mitrade.com notes. The publication specifies that not only Strategy has suffered from the sell-off. On August 21, shares of Circle, the issuer of USDC stablecoin, fell by 4% after the excitement caused by the company's IPO. The American crypto exchange Coinbase also showed a decline: its securities sagged by 2.5%.

This article was AI-translated and verified by a human editor