Summary

• I am upgrading Strategy stock to a "buy" rating due to adjusted valuations and limited downside potential following significant declines from all-time highs.

• Despite disappointing Q4 earnings, Strategy's substantial increase in bitcoin holdings and favorable cryptocurrency market conditions present a strong investment opportunity.

• Comparative valuation metrics show Strategy's price-book ratio has become more reasonable, making it a viable option within the cryptocurrency stock peer group.

• Technical analysis indicates potential support at $309.40 and suggests the recent downtrend may be ending, offering a new buying opportunity.

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When I last covered Strategy (NASDAQ:MSTR) stock with a “hold” rating on November 12th, 2024 with my article “MicroStrategy: Overvaluation Gets Dangerous”, the stock was rallying sharply in ways that I found to be quite alarming given the elevated premium newer MSTR investors were paying for exposure to the firm’s underlying Bitcoin (BTC-USD) assets. Following the publication of the article, the stock managed to rally even further (toward all-time highs of $543) before reversing sharply. However, all of the crypto-enthusiasm was relatively short-lived, and share prices encountered substantial declines after Citron Research revealed a bearish position due to “overheated” valuations. Ultimately, those declines forced the stock toward lows near $285 during the December 31st trading session, resulting in a drop of more than -47.5% from the peak and marking a surprising turnaround from the bullish sentiment that was seen during the previous month. Since then, we have started to see some evidence of stabilization in share prices, and I think that the stock’s adjusted valuations present a much better buying opportunity for investors that are looking to gain exposure to the stock. As a result, I will be raising my outlook to a “buy” rating based on the stance that further downside might be relatively limited at this stage.

Strategy: Trends in Bitcoin Holdings (Strategy: Q4 2024 earnings Presentation)

Of course, further share price declines have been seen since the firm released Q4 2024 earnings figures, which revealed losses that exceeded the market’s relatively unimpressive consensus expectations. Specifically, the Q4 results showed significant per-share losses of -$3.03 (at -$670.8 million) and this marks a stark contrast when compared to the positive earnings figure of $0.50 per share ($89.1 million) that was recorded during the same period the prior year. Revenue figures were also disappointing, at $120.7 million, which indicates an annualized decline of roughly 3% for the period. However, based on the conversations I have had with investors on this and other platforms, this is really not what catches the most interest. Conversely, the real “meat and potatoes” of the report can be found in the company’s bitcoin holdings, which increased by nearly 218,900. Those assets were purchased at the cost of $20.5 billion, and this activity marks the most substantial gain during any quarter in the company’s history. Recent buying activity has sent Strategy’s total bitcoin stockpile figures above 471,100 bitcoins, and this would place its value above the $45 billion mark if we use $96,500 as the basis for current BTC-USD prices. Of course, these valuations have been aided in large part by the fact that cryptocurrency prices have surged ever since Donald Trump assumed the role of President in the United States because he has made it very clear that his administration will be friendly and supportive to digital assets. With market prices in BTC-USD seeing gains of greater than 100% over the last 12 months, investors considering potential long positions in MSTR must consider potential pullbacks within the broader cryptocurrency market as a whole as a key risk while holding the stock.

Strategy: Comparative Price to Book Valuations (YCharts)

Additional potential risks can be found in some of the comparative valuation metrics that are associated with the company’s industry peer group. For example, if we look into the price-book ratios found in several of the peripheral cryptocurrency stocks, Strategy’s current valuation of 4.359x still looks extremely elevated even though significant declines have been witnessed over the last few months. Toward the end of 2024, Strategy was actually trading with price-book valuations above 25x (which is alarming in its own right). But even with these recent readjustments in the downward direction, only Coinbase Global, Inc. (COIN) is trading at a higher valuation metric within this peer grouping (at 7.882x). But this is also a stock that has traded with far less erratic volatility over the last three-year period, and this factor alone might make Coinbase a more attractive option for investors that are looking to gain cryptocurrency exposure through stock markets. Furthermore, the alternative stocks within this peer grouping are clearly trading at much more attractive valuations because Block, Inc. (XYZ) is currently seen with a price-book ratio of 2.654x. MARA Holdings, Inc. (MARA) and Riot Platforms, Inc. (RIOT) are trading at even lower valuations (with price-book ratios of 1.993x and 1.456x, respectively).

Strategy: Important Stock Price Support Zones (Income Generator via Trading View)

However, now that Strategy’s price-book valuations have fallen back toward more reasonable levels, I think that the stock can be viewed as an acceptable investment vehicle due to the fact that share prices now appear to have more limited prospects for further downside. To get a better sense of how far the stock might fall in the event that we were to see further declines, it is generally a good idea to outline historical price levels that have the potential to work as support zones. In the move lower from the all-time highs at $543 that were recorded on November 21st, 2024, the stock has formed a clear series of lower highs. Of course, this is the type of structure that characterizes a typical downtrend. However, MSTR has already started to show evidence of support formation, as the stock bounced sharply from the 78.6% Fibonacci retracement zone defined by the recovery rally from $285.01 to $404.38 (which is located near $310). Fortunately, this price reversal helps to define the stock’s February 3rd, 2025 lows of $309.40 as an important support zone that might be able to contain share price action going forward.

Strategy: Developing Bearish Harmonic Patterns (Income Generator via Trading View)

One form of analysis that presents a different outlook, however, can be found in the harmonic price structures that can be found on the shorter-term timeframes. For anyone unfamiliar with these types of price patterns, it should be understood that they are based on a series of Fibonacci retracement zones and long-term back testing data show that these structures can be highly valuable in helping to identify potential reversal points within a larger trend. In this case, we can see that the majority of the pattern formation that is showing on the shorter-term timeframes is bearish in nature. However, to a large extent, two of these patterns have already completed and this suggests that the stock’s prior downtrend might be reaching an endpoint.

Strategy: Standard Deviation Price Channels (Income Generator via Trading View)

In addition to this, share prices are currently moving into the -2 Standard Deviation on the daily timeframe. Roughly 2.5% of all price action would be expected to take place below the -2 Standard Deviation, so this gives us another reason to believe that share prices might be ready to start reversing in the upward direction (or at least that further downside might be somewhat limited). Current Elliott Wave analysis suggests that the fifth wave in MSTR’s daily trend structure could resolve near $587.16 based on the 1.618 Fibonacci extension - and this area rests within very close proximity to the +2 Standard Deviation price channel on the same timeframe. Essentially, what this tells us is that the stock would be able to move into these price regions without becoming over-extended or reaching extreme overbought territory. Given that these price channels are still centered in the upward direction on these longer-term timeframes, I think that the bearish nature of the shorter-term timeframe might be reaching a point of completion. For all of these reasons, I think that the late-2024 / early-2025 declines can be viewed as a new buying opportunity for this stock. As I have mentioned, there are other stocks within the peripheral cryptocurrency space that are associated with lower volatility levels, and these assets might present more stable trading opportunities for investors with a conservative mindset. However, for investors that are less risk-averse, I think there is potential here for a move back into the upper $500s now that the recent downtrend in share prices appears to be reaching a point of completion.