The jury is still out on S&P’s rejection of Strategy
Beyond its small software division, the company’s entire model relies on constantly selling new shares
There is a scene in American high school films where the dorky protagonist, nose pressed against the window, watches a party they weren’t invited to. The sting stems not just from missing the fun, but from the deeper pain of denied validation.
For the company formerly known as MicroStrategy, now rebranded as Strategy, that party is the S&P 500 index. Last week, it was left outside in the cold.
Superficially, the rejection seems baffling. With a market cap of around $95bn and $14bn in second-quarter operating income, the company meets the criteria for index inclusion. Nevertheless, the committee added mobile app marketing company AppLovin, trading platform Robinhood, and construction and infrastructure services group Emcor in its quarterly rebalancing. That leaves Strategy — which owns 640,000 bitcoin or 3 per cent of the entire supply — as one of the largest companies outside the index.
After the decision, executive chair Michael Saylor posted a slide on X showing the stock outperforming bitcoin and various indices including the blue-chip stock index, adding the caption, “Thinking about the S&P right now.” His online supporters were less restrained, calling the decision a “total clown show” and insisting “S&P 500 needs $MSTR, $MSTR doesn’t need S&P 500.”
Like most deities, the S&P committee offered no explanation. One likely reason is that Strategy functions more like a bitcoin investment fund than an operating company, and the index explicitly bars funds.
Strategy’s legacy software arm is a footnote. Instead of products or services, Strategy’s primary output is paper — and not of the pulp and cellulose variety. It issues common stock, preferred instruments, and convertible bonds to raise capital, which it then uses to buy and hoard bitcoin. And its reported operating income comes not from cash flow but from accounting gains tied to changes in bitcoin’s price. This fund-like structure arguably might count against inclusion.
To be fair, Strategy’s pivot from software to bitcoin in August 2020 has massively benefited stockholders. Since then, the stock has risen 25-fold, compared with bitcoin’s ten-times gain. But the model is showing cracks. It relies heavily on selling new shares at a premium to the net asset value of its bitcoin holdings. Strategy grandly terms this “bitcoin yield” — a measure that tracks increases in bitcoin per share but offers no actual income.
Problems emerged last autumn when Strategy announced a $21bn plan to issue equity. While presented as a three-year programme, it was exhausted within a few months. Since this surge in issuance began nine months ago, the stock has underperformed bitcoin itself. The “bitcoin per share” has increased, but the stock has dropped from a high of $543 in November to $325 today. Its premium — the amount it trades above the value of its bitcoin — has shrunk from around three times in November 2024 to 1.5 times today.
As one of Saylor’s most high-profile supporters wrote on X: “If you liked $MSTR at $500 with 331,000 BTC . . . [n]ot sure why you wouldn’t like $MSTR at $330 with 638,460 BTC.”
This underperformance raises an uncomfortable question: with spot bitcoin ETFs now widely available, is Strategy a sub-optimal way to own bitcoin?
As the premium erodes, the constant need to issue new shares weighs heavier. Saylor has tried to ease this pressure with four new classes of preferred stock, but investor demand has been patchy. Just last week the company managed to sell $200mn of common stock but only $17mn of preferreds.
This explains why the brave talk about the S&P 500 can’t conceal real disappointment. Beyond its small software division, Strategy’s entire model rests on constantly selling new shares. Index inclusion would have delivered a steady pool of forced buyers for every new share Strategy created. Stephens Inc estimates that S&P admission would have compelled passive funds to buy 50mn shares worth around $16bn.
The next rebalancing comes in December. Then we’ll see if the S&P’s rejection of Strategy was a temporary delay or a verdict on Strategy’s model. For now, the index has decided that a company whose main product is its own stock isn’t quite ready for prime time.