Investors condemn MicroStrategy's decision to increase BTC exposure with debt capital

• Citi downgrades MicroStrategy's shares citing concerns about its BTC buying policy.
• The sell-off may be exacerbated by Bitcoin's collapse below $18,000.

The shares of MicroStrategy, the largest corporate Bitcoin bull in the market, dropped by over 13% on Tuesday as Citi downgraded the recommendation to "sell." The analysts cited a lack of confidence due to the company's decision to finance the BTC purchase with the debt capital.

At the same time, Citi upgraded the fair value of MicroStrategy's shares from $200 to $250 based on a Bitcoin price of $19,200. MSTR closed on Tuesday at $289, down nearly 14% from $336 registered on Monday.

MSTR's chart

As FXStreet reported, MicroStrategy announced the plans to sell convertible bonds worth $400,000 and use the proceeds to increase its exposure to the cryptocurrency market by purchasing Bitcoins. Notably, the company has already purchased over 40,000 BTC (about $775 million at the current exchange rate). However, the equity market experts are skeptical about the new capital allocation strategy announced by Michael J. Saylor, CEO of the Virginia-based firm, in August 2020.

MicroStrategy rally overextended, strategy too risky

In a note to clients that was obtained by The Block, Citi said that the recent rally in MicroStrategy's stock was "overextended" and described its plan to raise $400 million via convertible notes to buy bitcoin as "aggressive" and possibly a "deal-breaker for software investors."

MicroStrategy's stock rally was overstretched, while its Bitcoin buying strategy too aggressive and risky, Citi analysts wrote in the note to the clients, cited by the Block:

After the close, MicroStrategy announced they plan to issue $400M in convertible notes to buy more bitcoin. While the magnitude of MSTR's initial bitcoin investment (~$450M), was essentially unprecedented, at least this was done with excess cash and at a lower price (~$11K vs. ~$19K). The issuance of new debt to fund Bitcoin purchases is aggressive and maybe a deal-breaker for software investors, who may fear they now own a more risky asset management business.

Also, MicroStrategy's CEO was too fixated on cryptocurrency, potentially at the expense of the operational activity of the company. The experts believe the obsession with Bitcoin buying might negatively affect the company's results and worsen the team's psychological climate.

Moreover, Citi pointed out that insiders had been selling the shares in recent months, meaning that they were not happy with Michael Saylor's Bitcoin buying strategy. Top management sold shares worth over $50 million. The President/CFO/COO Phong Lee sold nearly his entire position.  

According to Bitcoin Treasuries, the cost of the cryptocurrency purchased by the company increased from $475 million to $732 million, representing over 193% return on investments. 

Meanwhile, BTC dropped below $18,000 for the first time since November 29. The cryptocurrency tested $17,639 during early Asian hours before recovering to $17,990. BTC has lost nearly 6% in the recent 24 hours and over 4% on a week-to-week basis. Despite the sell-off, Bitcoin's long-term perspectives remain bullish.