$2B MSTR Preferred Shares Explained | Everything you need to know

Summary

In this video, the host explains MicroStrategy's plan to raise up to $2 billion through a preferred stock issuance. The video covers the nature of preferred stocks, their benefits, and how MicroStrategy plans to leverage them to fund Bitcoin acquisitions. The host discusses the advantages of perpetual preferred stocks, including annual dividends and potential convertibility into common stock, while emphasizing how this strategy helps the company secure funds and strengthen its balance sheet. Overall, the approach is framed as a smart way for MicroStrategy to accumulate more Bitcoin without needing to repay principal, thus enhancing shareholder value.

Takeaways

• 😀 MicroStrategy plans to raise up to $2 billion through the issuance of preferred stock as part of their $21 billion capital plan.
• 😀 Preferred stock is a hybrid financial instrument, positioned between common stock and debt, offering benefits like dividends and seniority over common stockholders in liquidation events.
• 😀 MicroStrategy's preferred stock is likely to include features such as convertibility into common stock, cash dividends, and provisions for redemption, although exact details are still speculative.
• 😀 Preferred stockholders receive annual dividends of 4-8%, making it an attractive option for institutional investors like insurance companies and mutual funds.
• 😀 The preferred stock will be perpetual, meaning it does not have a maturity date, allowing MicroStrategy to raise funds without a defined repayment period.
• 😀 The perpetual nature of the preferred stock allows MicroStrategy to pull future cash flow into the present, making it an effective tool for Bitcoin acquisition and strategic capital deployment.
• 😀 Preferred stockholders don't have voting rights, which protects common shareholders from dilution, although future dilution could occur if conversion options are exercised.
• 😀 The target market for the preferred stock includes institutional investors who are attracted by the stability and regular dividend payments, despite the volatility of MicroStrategy’s common stock.
• 😀 MicroStrategy’s history with convertible bonds shows a pattern of tapping into fixed-income markets to fund Bitcoin acquisitions, and this preferred stock issuance follows that strategy.
• 😀 The dividend payments associated with the preferred stock could be covered using other financial tools, such as convertible bonds with negative interest rates, allowing the company to maintain flexibility.
• 😀 The $2 billion raised through preferred stock issuance would likely be used to acquire more Bitcoin, reinforcing MicroStrategy's commitment to Bitcoin accumulation as a core strategy.

Q & A

What is the $2 billion preferred stock issuance by MicroStrategy?

The $2 billion preferred stock issuance by MicroStrategy is part of their larger plan to raise capital. This move aims to strengthen their balance sheet and acquire more Bitcoin. Preferred stock differs from common stock, as it typically provides fixed dividends and is senior to common stock in case of liquidation.

What is preferred stock, and how does it differ from common stock and bonds?

Preferred stock is a financial instrument that sits between common stock and bonds. Unlike common stock, preferred stockholders have priority in receiving payouts in the event of liquidation. However, it is not senior to bonds, which are paid first. Preferred stock also offers fixed dividends, unlike common stock, which can have fluctuating dividends.

Why is MicroStrategy issuing preferred stock instead of debt or common equity?

MicroStrategy is issuing preferred stock as a strategic way to raise capital without the burden of traditional debt repayment. This allows them to tap into a new pool of institutional investors who are interested in less volatile investment options with fixed dividends, while also avoiding immediate dilution of common stock.

How does the perpetual nature of the preferred stock benefit MicroStrategy?

The perpetual nature of the preferred stock means there is no set maturity date or repayment requirement. This allows MicroStrategy to bring forward cash that would otherwise be spread out over many years, which they can use to acquire more Bitcoin, without the immediate pressure of repaying principal as with a bond.

What is the potential impact of this preferred stock issuance on MicroStrategy's Bitcoin strategy?

This preferred stock issuance will likely enable MicroStrategy to acquire more Bitcoin by pulling future cash flows into the present. Since Bitcoin has historically appreciated, this move could provide a significant advantage as it strengthens their Bitcoin reserves and allows them to accumulate more over time.

What are the key benefits for investors purchasing the preferred stock?

Investors in the preferred stock can benefit from fixed annual dividends and a priority in payouts in case of liquidation. Additionally, if the preferred stock is convertible, investors might gain the opportunity to convert their shares into common stock at a later date, offering potential for upside if MicroStrategy’s value increases.

What is the purpose of the $21 billion capital plan mentioned in the transcript?

The $21 billion capital plan is a comprehensive strategy by MicroStrategy to raise funds through a mix of equity (including preferred stock) and fixed income instruments. The goal is to strengthen their balance sheet and continue acquiring Bitcoin, which is central to their long-term strategy.

What does the term 'convertibility' mean in the context of the preferred stock?

Convertibility refers to the option for preferred stockholders to convert their preferred shares into common stock at a future date. This could be valuable if MicroStrategy’s common stock appreciates over time, allowing investors to benefit from the company’s growth.

How does the dividend payout for preferred stock work, and what are the potential risks?

Preferred stock typically pays an annual dividend of 4-8%, depending on the terms. While this provides a stable income for investors, there is a risk that MicroStrategy may struggle to meet the dividend payments if their cash flow or Bitcoin acquisitions underperform. However, the company can manage these payments through other financial strategies.

What is the significance of the perpetual preferred stock’s embedded call option?

The perpetual preferred stock’s embedded call option gives MicroStrategy the flexibility to convert the preferred shares into common stock at a later date, depending on the terms. This can be an attractive feature for investors who are interested in the potential for conversion while providing the company with a more flexible financing tool.