Strategy Had a Massive Quarter: Impressive Numbers, But Are They Sustainable?

Transcript

I'm Steve Erlick, executive editor here at Unchained. I'm here with Lance Vatanza, managing director of equity research at TD Cohen and an active follower of Strategy. And we wanted to talk with you this morning to sort of digest this um blockbuster earnings report that Strategy just released. So, Lance welcome. >> Thank you for having me, Steve. >> So, let's just start there. Uh what were some of the big highlights that that you saw in their Q2 earnings? Well, uh, for me the biggest highlight is that the company has increased its, um, fullear, um, Bitcoin yield guidance from 25 to 30%. Um, the 30%, which is their new target, still appears conservative to

me, but it represents a doubling of the introductory guidance that the company first established earlier in the year. So I think that anytime a company um meets its raised guidance for the full year within seven months of the year, which is what strategy announced yesterday, and then increases their guidance to be a double of where they started the year. I think that that has to be considered pretty strong performance. I can't think of too many companies that I've covered that have ever been able to uh to pull that off.

So what what would you say were the main drivers behind their ability to do this? I mean I mean strategy Yeah. I mean I mean they're known for being aggressive in their targets anyway and and they blew them out of the water halfway through the year. >> Well certainly the um the the regulatory backdrop has been very conducive for um for strategy and for other public Bitcoin treasury companies or PBTC's as I like to call them. Um we've had um a number of favorable developments including um the Fazby uh rules change including um just yesterday you saw um uh in the crypto report coming out from the uh from the White House that uh

there would be um uh basically um uh an emphasis made to uh to to preserve favorable tax treatment for unrealized digital and crypto gains. Um, so there really couldn't have been a better backdrop and that's you've seen that in the price action of Bitcoin. Bitcoin has had a a very good run over the past 12 months. I mean, it's been volatile. Um, but you know, certainly it's um it's had nice favorable trajectory that has helped. But then of course, give credit where it's due. Um, I wouldn't say that strategy has just been aggressive. I would say they've been very creative in terms of how they've approached the capital markets. They've gone after it in a very systematic approach. They've

targeted specific um pockets of the capital markets. For example, first um the convertible bond market. Uh they were very successful in in raising and now they have about $8.5 billion worth of convertible notes outstanding. Many of those two billion of those came earlier this year. Then they went after the um the convertible preferred market with their strike issuance. That was successful. they then went to the highgrade uh you know highest quality corner of the preferred stock market with their strife offering and then most recently um they came out with a new instrument that's designed to appeal to more of a retail oriented investor. Um and so I think that um that the creative

approach, their ability to very efficiently issue capital and then funnel that capital into Bitcoin has been um the big driver in terms of how they've been able to put up these these great yields and these great gains for their for their common shareholders. >> Okay. So let's talk about that. Uh, and you you mentioned the new Fazby guidelines, which um I think was spearheaded by Michael Sailor himself in order to let them mark um their holdings to market as opposed to just having to record losses during during downturns. Uh $10 billion in in um in profit is massive, but I know there are some questions about uh how much of that sort of like um outsized performance might

just be because they recently started uh using these new guidelines. Could you maybe put their performance in historical perspective if they had the ability to go back to August 2020 and mark their holdings to market way back then? >> Sure. Um what we would see if we've gone back and we've gone back and done that and we we'd see that um that um the the the progress is definitely going up and to the right. Um there is no question that restating 24 in particular would have shown pretty dramatic gains but not as big as the gains that we've seen so far in 2025. Um so through uh uh through yesterday the company had reported over $13 billion

of Bitcoin dollar gains. Now that is just represent that just represents the value of the incremental Bitcoin that they have created without issuing any additional common shares. It ignores the additional value from the fact that Bitcoin has increased dramatically over the period. If you compare that 13 billion year-toate number in 2024, which was a big year for the company, but the total was $12 billion for the full year. So again, they've exceeded the full year 24 number in just the first uh 7 months of this year. And we think and their new guidance of course is 20 billion. So they're sort of saying, hey, we think

we're going to double what we almost double what we did last year. So, um I think that it is true that um uh that while the the the growth looks astronomical when you compare it to nonfazby, you know, altered numbers, even if you were to go back and recast those numbers, you'd still see very strong growth here. >> So, let's talk about um some of their plans for the capital stack because I I know a big part of the earnings related to some some announcements there. Uh for one uh it does seem like they're looking to move past uh convertible debt. I I know that they have a relatively clean balance sheet in terms of debt visa vbook equity and just unencumbered Bitcoin holdings, but it it appears they're trying to retire that. So maybe

we start there. Um what did what did you hear and um what do you think that means for their capital market strategy moving forward? >> I think it's a good thing. It demonstrates the favorable evolution in their ability to access the capital markets. I think the convertible bond market given that it is um you know rife with hedge funds and arbitrageers who are seeking um you know basically they're they're they're taking long exposure on micro strategy by buying the convert but then they're on a heavy delta and then they're shorting stock to basically reduce their net exposure something like 25%. So they're selling a lot of stock for every bond that they buy and they're just a little bit long Micro Strategyful. That was um the best avenue for the company, you know, years

ago. But as the company as Micro Strategy Strategy has grown um they've been able to access uh the preferred stock market where you just see much better terms, much better accretion, much better torque, um much better efficiency in terms of pricing. So there are just a lot of reasons why as the company has grown it um it no longer has to be dependent on the convertible bond market. Now the interesting lesson here I think is that I see this path that strategy is this trail that strategy has blazed. I see this apply to many of the upstart PBTC's, the 21s, the pro caps of the world, others where I think that um I think that it'll be common for many of

these companies to begin their journeys as PBTC's in the convertible bond market and hopefully some of them will grow large enough and be successful enough that they will then ultimately gain access to the preferred equity market and then you'll see them sort of follow that same path where they maybe come to if they're fortunate, they'll come to rely less on convertible debt and more on some of these other um credit oriented instruments. That was going to be my next question because I mean and I know that you can only publicly talk about companies that you you actively cover. But when we look at all these other crypto treasury companies and and not just the ones focused on Bitcoin,

but looking at Ether and Salana and and further out on the um on the altcoin landscape, I mean, we see Pike deals. Uh we see a lot of converts. Uh like we see Spaxs. I mean, and it looks like it's really just a huge race to it's such a momentum game and strategy is sort of in its own world still at that point that like these other companies are doing everything that they can to just get as much size as quickly as possible so they can continue to raise creatively. Um maybe just talk a little more about the converts because those make up meaningful parts of those capstacks. Um what are you said it's the right time for them to pass to be doing this. What

are some of the markers that might suggest that they can move into the preferred equity market as as you mentioned or just in a general sense what are some of the risks that investors who might be either buying this debt or buying equity in these companies should know um if they also have a large amount of debt? >> Well, it's a good question and I'm not sure I can give you a great answer. Um, I would just say they they need to be a lot larger than they are today. Um, if you think about how big Micro Strategy was, Strategy was in terms of its market cap, in terms of its Bitcoin holdings, it only it' been doing this for four years. It started in fall of 2020. And it wasn't until early this year in January that Strategy issued its very first preferred equity instrument. So,

um, and that was at a time obviously where the stock had already done very very well. It was already a very big company. So um I think that um you know look the good news I think is that um convertible debt financing can be very accretiveous and and micro strategy has shown that. So um having to start out or starting one's PBTC journey in the convertible bond market can be uh can be very lucrative can be very accretive for common shareholders if it's done correctly. uh time will tell as to how well these new companies execute. I want to just add here though that from the standpoint of strategy which is the company no none of these

company I look this is not a winner take all situation there is room for many many PBTC's in my opinion um I agree with Michael Sailor who has been very actively courting other companies and doing everything he can to assist them to become PBTC's and he's doing it for all the right reasons it will ultimately um increasing PBTC's uh they're they're not all competing for a fixed pool of capital. The more PBTC's form, the more the P the greater will be the pool of capital that that the PBTC sector will attract. Um, at least in my opinion and I think that the more integrated you will see Bitcoin into the uh broader global financial system. So

all of those are conditions which will be beneficial to strategy. So I think strategy is helped not hindered by additional PBTC's going forward. >> Something else that was mentioned dur during the report I wanted to ask you about is I guess this new um promise not to issue more common shares unless the MNAV remains over one and I guess that's to to ensure that they're continuing to raise accretively and not to unnecessarily dilute dilute shareholders. This is a big um this I I think is something that will be reassuring to to investors and and and maybe something that but I also wonder like how replic replicable that may be across uh across

the entire ecosystem because uh like there are compan traded below its premium for a little while this year. It might be over now. uh and there could be other companies um in the future that trade below and then they may have to they may try to raise more money with the promise of of bigger returns in um moving forward. So just what are your thoughts on on this sort of pledge that the company made and um yeah >> sure um so uh I think that um you know I I can't really speak to what other companies may or may not do but from the standpoint of strategy I I I don't think the the commitment to not issue when MNAV is less than one is terribly novel

or or unexpected or I mean they've never done that And we certainly wouldn't have expected them to do that. What we do find interesting though is their pledged that unless MNAV is 2.5 or high, so unless they're trading in my terms, I prefer to talk about a premium unless they're trading at 150% premium to NAV, they're not going to issue equity except to pay dividends, interests, and perhaps some other kind of, you know, general corporate expenses. um but they won't be using they won't be issuer. So in other words, they could be trading at a you know MAB of two and they won't issue common stock to go out and buy more Bitcoin. That to me is different.

Clearly that represents a change because the company has very recently issued meaningful amounts of common shares at MNAVs well below uh 2.5 I think less than less than two if I'm not mistaken. Probably as low as 1.8 8 1.9 certainly um and so so that is a change um and to your point though I do I agree with you I think it will be very um reassuring to uh to common shareholders um going forward at the same point I guess the question is you know does that put pressure how much pressure does that put on the company's engine if they are only going to be issuing common stock uh you know when the MNAV is is above two and a

half and today the MNAV is you know is is 1.8 something like that >> been two and a half I think late last year >> then then they're going to need to lean pretty heavily on and they don't want to do any more convertible notes right so they're going to need to lean pretty heavily on the on the new preferred issuance um which you know up until today's date have been I mean the what they've done in the primary markets has been uh well what they've done in their IPOs I should say has been spectacular um but what they've done on their ATMs has been um you know I don't want to say underwhelming but certainly it hasn't been uh to the same degree of of enthusiasm that we've seen. We think

that could change with the new STRC variable rate preferred. If you look at the volume of trading in the secondary market over the first week or so of that issue being listed on the NASDAQ, the volume is then very very strong and that suggests that we might see much greater issuance of that new preferred under its ATM facility. And as you know that ATM facility was just implemented yesterday. Um at the same time the company announced their earnings, they announced that they'd established the new STRC variable preferred ATM. Yeah, and I remember the first issue when it said it was upsized from 500 to 2.5 billion um because of that that exceptional end for it. So, um and and just to be clear as

well, I mean these are just pledges like theoretically um and there's no reason to suspect that they'll go back on it, but like they could change their mind if they if they needed to. There's nothing that would stop them from that except I guess like um impacting market. But >> exactly right, many Michael Sailor followers um have a lot of faith in him because of how um dogmatic and orthodox he's been about his his diamond hand strategy since since they started this back in August. Uh one other quick thing and then we we're going to start wrapping up. They also started discussing more um the Bitcoin per share metric and and sort of discussing how that can be used in in conjunction with the um the Bitcoin yield.

metric that that Sailor introduced about a year a year year and a half ago. Um could you maybe just quickly walk us through the difference between those two and and why um why the second metric? >> Well, they're two sides of the same coin. You you can't calculate a Bitcoin yield without referencing Bitcoin per share, right? So for example, if you see in our published research where we report the company's progress on Bitcoin yield, you can see quite clearly the Bitcoin per share stats that are underlying those data, right? So um I I don't really I don't think we should make too much of this because they were always relying on Bitcoin per share. Why they decided to show it in this

particular instance? Um you know, that's a fair question. I don't really know the answer, but I do think it is, you know, it is compelling. I mean, I like to think about it in terms of, hey, if you go back to the beginning of 2023, which wasn't that long ago, about 19 months ago, right? Since that time, the company's increase in Bitcoin per share is 130%. So, think about that for a second. You own more than twice as many bitcoins per share today than you did 130% more than you did, you know, just 19 months ago.

That's pretty impressive. I like to think about it the same way when I think about the Bitcoin yield for 2025. If we pull forward to 2025, they reported a Bitcoin yield of 25%. Well, what does that mean? That means that we own 25% more Bitcoin per share today than we did before. You know, do I care what the Bitcoin per share number is? Not necessarily, right? I really care more about how quickly Bitcoin per share is growing. So for me, I believe that yield uh will always be more relevant than the underlying Bitcoin per share. Um but you know, uh you can't have one without the other.

>> Yeah, fair enough. Um just one or two more quick ones. I know this was something that you wanted to ask him yesterday and it's a question that's on a lot of people's minds. Uh, right now Strategy owns I guess a little less than 5% of all the Bitcoin that's ever been been minted and um I wanted to get a sense of I I wanted to get a sense of like what the endgame is and and how healthy it is for for companies like this to really market or sorry corner the industry when it could be argued it's still kind of in its infancy. So, just to um clarify, right now with about 630,000 roughly bitcoins, they own about

3% of the total of bitcoin that will ever be mined. Um, and that includes the, you know, roughly 5% of the bitcoin that are presumed to have been lost. We're just taking, you know, the 630k over 21 million, it's about 3%. Um if we uh if we think about that in the context of you know what this company can do. I I personally um and you're right I I did ask the question yesterday and I I I thought the answer was um was helpful. You know the fact of the matter is the company has a long way to go. There will come a point necessarily someday when they own about as much Bitcoin as they, you know, can

own before uh before owning more Bitcoin starts to be counterproductive to the establishment the further development of Bitcoin throughout the financial systems. But you know what is is that 30% 20%. Now I'm not suggesting the strategy is ever going to own anything like that. My point is that they that they in theory they could and it would not necessarily impede the progress of establishing Bitcoin throughout the financial systems. The reality is I suspect and this is just my suspicion. I suspect the strategy has another 10 years to really go at it aggressively and acquire as much Bitcoin as they can. Our model, our published

model we published this morning shows them owning about 4.3% of all Bitcoin ever to be mined by the end of 2027. So that's up 130 basis points in two in almost two and a half years. So if you sort of think about that given that it gets harder to increase the law in larger numbers, right? So it's um presumably they're not going to be able to increase you know it's if you run that out do you get to 10% in 20 in 2035 maybe you know somewhere I don't have the projection out that far so I want to be a little bit cautious there but but you see what I'm I'm saying in terms of a progression over the next couple years and and the rate of increase.

>> Okay. And just last question, I I know uh we started off the conversation talking about how they've increased some of their targets um this year because of their success in implementing their accumulation strategy over the first six months. Uh I know in the report that you published this morning, you've also um uh you've also um made some adjustments as well. So So what what are your targets um through the end of the year based on uh what you saw yesterday? So we're we're now targeting a 32.1% Bitcoin yield. So that compares it's 2.1% more than the company's sort of minimum or target at this point. And I guess what we're saying is that we think

that the company is likely to increase the target or exceed the target by the end of the year. Um, personally, I would not be at all surprised if they uh if they're pretty darn close to the 32% by, you know, by by the end of the third quarter or at least the 30%. So, um, I suspect that when they report the third quarter, they'll increase their fullear guide yet again. Um, and to be honest, you know, I I suspect the risk to my number at 32.1%. I think that there's arguably more risk to the upside than to the downside there. Um so what that means is that the company is going to I think you know by their reported metrics they'll have no problem meeting their $20 billion um you

know Bitcoin gain target um which again is up from 15 billion two days ago and it's up from 10 billion when they first introduced guidance for Bitcoin dollar gain for 2025. So, um, you know, where that comes in, you know, time will tell. We calculate Bitcoin dollar gain a little differently. We look at the actual price paid for the Bitcoin rather than the ending period price. So, our calculation is necessarily less. It doesn't compare apples to apples with theirs. Um, so, uh, for what it's worth, we're forecasting the company to generate $15.3 billion of, uh, of Bitcoin dollar gain this year. And

actually, we have, uh, 16 billionish in each of the next two years. So, you know, depending on how you calculate it, you can get to, you know, anywhere from 16 to to 22 billion depending on what sort of, you know, how you go about making the calculation. we take a more conservative TAC um which we think is appropriate um but again you know um there's uh there's there's no uh necessar there isn't necessarily one answer here. >> Okay, great. Well, thanks for your time this morning. Thanks for coming on Bits and Bips and uh we look forward to having you back.

>> My pleasure. Thanks so much.