Targeting a $2 Billion Perpetual Preferred Stock Offering as a Benchmark for Success

MicroStrategy’s $2B Perpetual Preferred Stock Offering: A Benchmark Analysis

Since MicroStrategy (MSTR) transitioned to a bitcoin treasury company in August 2020, it has employed three primary methods to acquire bitcoin: cash on hand, at-the-market (ATM) offerings, and convertible bond offerings. The company’s next capital-raising strategy involves purchasing bitcoin through perpetual preferred stock, announced on January 3.

Perpetual Preferred Stock: A Flexible Instrument

A perpetual preferred stock typically has no fixed maturity date and continues indefinitely unless the company chooses to redeem it or set a maturity date. Shareholders receive fixed dividend payments but have no voting rights. The company may have the right to buy back the stock at a predetermined price after a specific date. In the case of a liquidation event, perpetual preferred stockholders are paid before common shareholders but after debt holders.

Perpetual stock is an attractive instrument due to its lack of a set maturity date, which differs from MSTR’s convertible bonds with a typical tenor of four to eight years. According to Michael Saylor, executive chairman of MicroStrategy, perpetual preferreds offer extended duration, working as an embedded, indefinite call option in addition to a lump-sum principal payment. This extended duration makes the capital structure less fragile.

Advantages for Institutional Investors

Perpetual preferred stock could achieve a mid-single-digit yield with low volatility and no-options market, contrasting with convertible bonds. This stability would make perpetual preferreds attractive to big institutions like pension funds and banks, which receive stable and fixed dividend payments.

Although the terms of the perpetual preferred stock have not been announced, MicroStrategy stated that the offering will be coming sometime in the first quarter. The terms likely include dividend payments, convertibility to class A common stock, and provision for redemption of shares, as mentioned in the company’s press release on January 3.

Benchmark Analysis

Benchmark maintains its buy rating on MSTR with a price target of $650. As of Monday, MicroStrategy purchased an additional 2,530 BTC, bringing its total holdings to 450,000 BTC. The Special Meeting for Shareholders will take place on January 21, where investors will vote on increasing the authorized class A common stock and preferred stock.

The company’s Q4 earnings call is set for February 4. With the perpetual preferred stock offering, MicroStrategy aims to expand its bitcoin treasury while maintaining a flexible capital structure.