The Contrarian Case for MSTR Amid MSCI Delisting Debacle

Key Points

• Strategy's pivot toward Bitcoin has backfired in recent weeks as the crypto industry has plunged.
• The company faces additional selling pressures amid speculation that it could be delisted from MSCI indices.
• While these factors promote short-term volatility, investors believing in Bitcoin's long-term trajectory might see an opportunity to buy, as Strategy's fundamental strengths and approach remain unchanged.

Shares of Strategy Inc. NASDAQ: MSTR, formerly known as MicroStrategy, have fallen by 43% year-to-date (YTD), with a substantial portion of this decline taking place in the last month.

The company's bid to broaden its scope from a software firm to a Bitcoin treasury in recent years has led to conflicting opinions about the stock.

As Strategy has accumulated hundreds of thousands of BTC, it has generated speculation that the popular Morgan Stanley Capital International (MSCI) indices may remove MSTR shares due to its deep exposure to the crypto market. 

Capital outflows, the volatile nature of crypto assets, and Strategy's perceived departure from its core software operations have made investors wary.

Short interest in MSTR stock has ballooned by almost 9% in the last month alone, reflecting this skepticism. Further, multiple analysts lowered their price targets for MSTR after its latest earnings report in late October. Still, both crypto bulls and those who believe in Strategy's software operations see the current volatility as a potential entry point for high-risk, high-reward portfolios.

The Risks and Possibilities of a Leveraged Bitcoin Strategy

Strategy has shifted in recent years to a leveraged Bitcoin acquisition model, in which the company has utilized its cash reserves and issued preferred stock in order to fund the purchase of more than 600,000 BTC since 2020. It has then held Bitcoin on its balance sheet while continuing to maintain its significant analytics software business.

Certainly, there are significant risks associated with shifting billions of dollars toward cryptocurrency—and these have been highlighted particularly in recent weeks as a multi-month Bitcoin rally has collapsed, bringing the price of coins down below $90,000 for the first time since April. However, optimists might point to Strategy's unique approach—because, unlike other companies that have shifted to become Bitcoin treasuries, it has retained its core business, providing a buffer in case of crypto volatility.

Some investors may perceive MSTR as having asymmetric upside potential due to this approach, with the stock's performance potentially outperforming BTC during cryptocurrency upcycles, thanks to its dual nature.

The Impact—Or Lack Thereof—From MSCI Delisting

One reason investors have shied away from MSTR in recent weeks is rumors that it may be delisted from MSCI indices because of its reliance on Bitcoin. Delisting would undoubtedly cause further volatility, as it would prompt exchange-traded funds (ETFs), mutual funds, and institutional investors to rebalance portfolios away from MSTR shares.

However, while a delisting would increase short-term volatility, it does not fundamentally impact Strategy's Bitcoin accumulation model or software operations. If investor fear drives MSTR’s price below its Bitcoin-equivalent value, the stock may present a value opportunity relative to its holdings.

Shoring Up Against Bitcoin Volatility

Responding to concerns surrounding the inclusion of billions of dollars worth of BTC on its balance sheet, Strategy recently announced the establishment of a $1.44-billion USD reserve specifically to support preferred share dividend distributions and debt costs.

Although it did not immediately reverse the selloff of MSTR stock, it should give cautious investors some reassurance that the company will be able to maintain its dividends at the current level for up to two years. So long as Strategy continues to focus on Bitcoin, it will carry risks associated with the cryptocurrency space.

However, investors who believe in the macro trajectory of BTC and are willing to take on a high degree of volatility in the short term might use the recent price decline—and any further turbulence related to a potential delisting—as an opportunity to buy while the prices of both shares and Bitcoin are low.

As disruptive as a delisting might be, it represents a technical problem for Strategy rather than a fundamental one, and analysts still see the company nearly tripling in value once again despite these issues.