Market Mispricing: A Tale of Two Yields

Khing Oei, a former Goldman Sachs credit investor, has shed light on the markets’ mispricing of MicroStrategy’s STRC preferred stock. According to Oei’s analysis, the market is assuming that the 14% yield on STRC will continue indefinitely, despite the fact that the shares have no maturity date and do not guarantee repayment of their face value.

This assumption is naive, as evidenced by the shares’ decline during June’s Bitcoin selloff, which plummeted them 25% below par. However, Oei argues that this only added to the yield’s allure, making it seem more attractive than it actually is. By valuing STRC like a bond, he calculates that the actual cash payouts are significantly lower than the market assumes.

Oei strips away the senior claims and focuses on the $50.2 billion backing the preferred shares, producing striking numbers. Even if Bitcoin never rises in value, the dividends will last for 29 years at a 12% discount rate. This means that STRC is worth $96.30, yet the market prices it at $85.29 – a staggering 13% mispricing.

The implications of this mispricing are significant. If Oei’s valuation is correct, buyers are essentially collecting the 14% yield while the price climbs toward fair value. Conversely, if the market is right, the discount could be a warning sign that the dividend may one day stop. This highlights the risks of relying on simplistic calculations and assumptions when valuing complex financial instruments.

The story of MicroStrategy’s STRC serves as a reminder that even in the world of high finance, simple math can be powerful. As investors and market observers continue to grapple with the complexities of financial instruments, Oei’s analysis offers a much-needed dose of clarity and perspective. Will the market eventually come around to his way of thinking? Only time will tell.

MicroStrategy continues to hold the levers that determine STRC’s value, and the road back to $100 will be fraught with twists and turns. But for now, Oei’s analysis has illuminated a crucial aspect of the markets – a mispricing that could have significant implications for investors in the months and years to come.

The question remains whether the market will correct its course or continue down the path of oversimplification. As investors weigh their options and consider the long-term prospects of STRC, Oei’s analysis serves as a timely reminder of the importance of nuance and careful consideration in high finance.