Why Strategy Stock Tumbled on Thursday

Key Points

• The company has its detractors, and one chimed in with a research update.

• In doing so, he reiterated his sell recommendation in no uncertain terms.

• 10 stocks we like better than Strategy ›

A negative analyst note published before market open on Thursday was the wet blanket that dampened Strategy (NASDAQ: MSTR) stock. The company, now transformed into almost a pure-play Bitcoin investor, saw its shares slump to close the day almost 2% lower in price. That compared unfavorably to the S&P 500, which shed a comparatively modest 0.4%.

A bear weighs in

The prognosticator who authored the Strategy update was Gus Galá of Monness, Crespi, Hardt. In the note, Galá reiterated his sell recommendation and $175 price target on the company. That's far below the stock's most recent closing price of $337.58.

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Image source: Getty Images.

According to reports, Galá zeroed in on several discouraging elements of Strategy's business in the note. He expressed concern about the premium valuation of the stock versus its total Bitcoin holdings. And he believes that the company might take hits to its financial strength with its growing load of convertible bonds (issued to, of course, raise funds to buy more Bitcoin).

Regarding convertible bonds, they either remain as debt or are converted into equity. The danger for an issuer of such securities is that they could weigh down a balance sheet with excessive debt, or on the other hand be quite dilutive to existing shareholders if many holders convert to equity.

Exposed to potential volatility

Another danger for any company with heavy Bitcoin exposure -- and Strategy is Exhibit A for this grouping -- is that it's very exposed to developments with its favorite asset. Lately Bitcoin has been performing well, at times shattering all-time highs. However, even though it's at the top of its asset class, it's still a cryptocurrency -- and as ever, cryptos can be volatile investments.

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Eric Volkman has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.