Strategy's "Fly to the Moon"

Compiled: Vernacular Blockchain

Today, we take an in-depth look at Strategy's (formerly MicroStrategy) Q2 2025 financial report, which is the company's first quarter to achieve net profit after adopting fair value accounting standards, creating one of the largest quarterly profits in the company's history.

News

• The Bitcoin treasury strategy of Strategy generated a net income of $10 billion (compared to a loss of $102.6 million in the second quarter of 2024), fully driven by unrealized gains of $14 billion in Bitcoin under the new accounting standards.

• The software business remains stable but secondary, with revenue of $114.5 million (an increase of 2.7% year-on-year), a narrowing profit margin, contributing approximately $32 million in operating income.

• Aggressive capital raising continues, with $6.8 billion raised in the second quarter through equity and preferred stock issuance, expanding Bitcoin holdings to 597,325 BTC, accounting for 3% of the circulating supply, valued at approximately $64.4 billion.

• The stock price of Strategy fell 8% from $401 to $367 after the announcement of a $4.2 billion market issuance of STRC shares, and has now rebounded to over $370.

• Strategy stock price is at a 60% premium to the net asset value (NAV) of Bitcoin, meaning investors are paying $1.6 for every $1 of Bitcoin value.

Investment Thesis

The Bitcoin vault strategy of Strategy is effective in the context of the appreciation of Bitcoin and the continued availability of capital markets, but it introduces significant yield volatility and equity dilution risks, rendering traditional software indicators irrelevant. However, its first-mover advantage in the Bitcoin vault space provides significant cushioning against Bitcoin price crashes.

Financial Performance: Bitcoin is the key driver.

Strategy achieved a net income of $10.02 billion in the second quarter of 2025, in accordance with Generally Accepted Accounting Principles (GAAP), contrasting sharply with a net loss of $102.6 million in the same period last year. Diluted earnings per share reached $32.60, compared to a loss of $0.57 per share in the second quarter of 2024.

This 9870% net income surge year-on-year is almost entirely attributed to the $14 billion unrealized gains on Bitcoin under the fair value accounting standards adopted in January 2025. The previous accounting standards required companies to value their BTC holdings at cost less impairment, meaning that price increases were not recognized as income, while price declines required impairment to be recognized.

The scale of this accounting impact is more pronounced when compared to the revenue of Strategy's operating business. Strategy's total revenue in the second quarter was only $114.5 million, which means the company's reported net profit margin exceeds 8700%, a phenomenon entirely driven by the revaluation of cryptocurrencies.

After excluding the Bitcoin revaluation, the basic operating income is approximately $32 million, and the healthy profit margin for software revenue is about 28%, but it is insignificant compared to the enormous gains from cryptocurrencies.

GAAP operating income reached $14.03 billion, significantly improving from an operating loss of $200 million in the previous year due to Bitcoin impairment.

Quarterly fluctuations have been extremely intense. In the first quarter of 2025, a GAAP net loss of $4.22 billion was recorded due to the price of Bitcoin falling to around $82,400. With the price of Bitcoin rebounding to $107,800 in June, the $10 billion profit in the second quarter marked a more than $14 billion quarter-over-quarter turnaround.

The management acknowledges that fair value accounting makes earnings "extremely sensitive to Bitcoin market prices." The profitability of Strategy now mainly fluctuates with the cryptocurrency market rather than software sales.

Adjusted net income (excluding stock compensation and other non-cash items) was approximately $9.95 billion, nearly unchanged from the previous year’s -$136 million, as Bitcoin-related adjustments far exceeded traditional adjustment items.

Funding Vault

As of June 30, 2025, Strategy holds 597,325 Bitcoins, an increase of more than 2.5 times from 226,331 Bitcoins a year ago. Currently, with additional purchases in the third quarter, the holding has reached 628,946 BTC. The total cost basis is $46.094 billion (average of $73,290 per BTC), while the market value is approximately $74.805 billion, resulting in an unrealized gain of about $29 billion - more than double the reported gain from the second quarter.

In the second quarter, Strategy acquired approximately 69,140 BTC for about $6.8 billion, equal to the total capital raised during the season. The average purchase price was around $98,000/BTC, indicating that the company steadily accumulated after the April low. No Bitcoin sales occurred, following Chairman Michael Saylor's "HODL" strategy, with no realized gains.

The financing structure has evolved into complex capital market operations:

• Common Stock ATM Program: Approximately 14.23 million shares were issued in the second quarter through market issuance, raising $5.2 billion, with an additional $1.1 billion raised in July. The program has approximately $17 billion of remaining capacity.

• Preferred Stock Series: Strategy innovates various perpetual preferred stocks to continuously raise funds for Bitcoin purchases in any market environment, while limiting ordinary share dilution. Different series offer diversified yields and terms to match the needs of investors at the time.

• Convertible Bonds: Issued $2 billion of 0% convertible senior bonds due in 2030 in February, with a conversion price of $433.43. Bondholders can choose to convert to Class A common stock when the stock price exceeds $433.43, which will further dilute existing shareholders but can eliminate debt. In the first quarter, $1.05 billion of 2027 convertible bonds were converted to equity through this route.

This capital structure supports the continuous accumulation of Bitcoin but introduces significant fixed costs. Preferred stock requires high dividends (8-10% annualized, totaling hundreds of millions of dollars) that must be paid regardless of Bitcoin performance. The strategy maintains a leverage ratio of about 20-30% (debt relative to BTC assets), which means equity/preferred stock issuance is the primary source of funding rather than debt.

Software business: stable but secondary

Traditional analysis business achieved revenues of $114.5 million in the second quarter of 2025, a year-on-year increase of 2.7%, recovering growth after a decline of 3.6% in the first quarter. The revenue structure continues to shift towards subscription services:

• Subscription services: $40.8 million (up 69.5% year-on-year), accounting for approximately 36% of total revenue, higher than 22% a year ago.

• Product license: approximately $7.2 million, a decrease of about 22%, due to customers migrating to the cloud.

• Product support: $52.10 million (a year-on-year decrease of 15.6%), due to a decrease in maintenance revenue caused by the cloud transformation.

• Other services: $14.4 million (down 11.8% year-on-year), reflecting a decrease in consulting demand.

• The software gross profit was $78.7 million (gross margin 68.8%), down from $80.5 million (gross margin 72.2%) in the second quarter of 2024. The margin compression was due to rising costs of subscription services (cloud hosting, customer support) and the loss of high-margin support revenue.

Operating expenses have historically been comparable to gross profit, resulting in slim software operating income. The approximately $32 million non-Bitcoin operating profit in the second quarter indicates that the core business has achieved moderate profitability after years of cost reductions. This portion of income helps to cover interest ($17.897 million) and part of the preferred stock dividends ($49.11 million), but it accounts for less than 1% of the company’s total profit.

It is expected that Strategy will continue to operate its analytics business similarly in the coming quarters, as it is the only cash-generating activity for the company, and the Bitcoin strategy is to "buy, hold, but not sell." However, management's comments focus on Bitcoin accumulation rather than the product roadmap, indicating that while software services will continue, they will no longer be the main growth driver or valuation factor.

Cash Flow Quality and Sustainability

The cash flow situation of Strategy highlights the low quality of its reported earnings. The net income of $10 billion generated almost no cash after excluding $14 billion in unrealized gains. In the first two quarters of 2025, the company's cash balance only increased by $12 million, despite reporting a GAAP net income of $5.75 billion.

• Operating cash flow: The software business may generate moderate positive cash flow sufficient to cover basic expenses. After deducting non-cash items such as depreciation and stock compensation, the actual operating cash flow is close to breakeven.

• Investment cash flow: In the second quarter, Bitcoin purchases amounted to approximately $6.8 billion, fully funded by financing activities rather than operating activities.

• Financing cash flow: Net proceeds of $6.8 billion from equity and preferred stock issuance, immediately used for Bitcoin purchases, with very little cash retained.

This negative investment, positive financing, and thin operational cash flow model suggests that the Strategy is more like an asset accumulation tool rather than a cash-generating business.

The company is facing rising fixed costs from debt interest (approximately $68 million annually) and preferred stock dividends (approximately $200 million annually). If the price of Bitcoin stagnates or declines, while capital markets tighten, the strategy may face liquidity pressure, necessitating the sale of Bitcoin or further equity issuance, leading to further dilution of ownership.

Market Reaction and Valuation

Despite recording record earnings, the stock price of Strategy fell after the release of its Q2 earnings report, as the market had already priced in the Bitcoin-driven gains. The subsequent news of a $4.2 billion STRC marketable stock issuance further pressured the stock price. The market reaction also reflected investors realizing that these were not operational earnings, but rather potentially reversible mark-to-market adjustments.

However, the stock price is closely related to the price trend of Bitcoin.

Strategy currently has a premium of about 60% compared to the net asset value of Bitcoin, meaning that investors are paying $1.6 for every $1 of Bitcoin value. The reasons for the premium include:

• Gain potential appreciation in Bitcoin per share value through corporate structure.

• Michael Saylor's strategic execution and market timing.

• The scarce value of Bitcoin as a liquid proxy in the equity market.

• The option value of future capital raising with appreciation.

This premium supports a self-reinforcing strategy: issuing shares at a price above NAV to buy more Bitcoin, potentially increasing existing shareholders' Bitcoin holdings per share. If the Strategy's share price is $370, and the Bitcoin NAV is $250 per share, the company can sell new shares at $370 and use the cash to purchase $370 worth of Bitcoin. As a result, existing shareholders' Bitcoin holdings per share increase. From 2025 to date, despite significant dilution, the Strategy's "Bitcoin per share" metric has still grown by 25%, validating the effectiveness of this strategy during the Bitcoin bull market.

The Bitcoin strategy of Strategy requires investors to adopt unconventional evaluation methods, as traditional valuation metrics have become meaningless. The second quarter revenue of Strategy ($114 million) indicates an annualized revenue of approximately $450 million, while the enterprise value is $120.35 billion, implying a price-to-earnings ratio exceeding 250 times based on revenue, which is astronomically high in traditional terms. However, investors are not betting on the software analysis business of Strategy by purchasing its stock, but rather on the appreciation potential of Bitcoin amplified through the company's leverage and continuous accumulation.

Investment Perspective

The performance in the second quarter reflects Strategy's complete transformation from a software company to a leveraged Bitcoin investment tool. A quarterly profit of $10 billion is immense, but it represents unrealized gains rather than operational success. For equity investors, Strategy offers high-risk exposure to Bitcoin, accompanied by significant leverage and continuous accumulation, but at the cost of extreme volatility and dilution risk.

During the Bitcoin bull market, the strategy performed well due to market support for value-added capital raising, with reported earnings skyrocketing due to market pricing. However, the sustainability of this model relies on continued market access and Bitcoin appreciation. Any significant drop in cryptocurrency will quickly reverse the gains of the second quarter, while the fixed obligations of debt interest and preferred stock dividends persist.

However, among all Bitcoin vaults, Strategy is the most capable of absorbing such unexpected shocks. It began accumulating Bitcoin five years ago and systematically increased its holdings at a cost far lower than other companies.

Currently, Strategy holds 3% of the total circulating supply of Bitcoin.

The premium valuation of Strategy reflects the market's confidence in Michael Saylor's vision for Bitcoin and his execution capabilities. Investors are betting on the long-term trajectory of Bitcoin and the management's ability to maximize accumulation through the corporate structure.

Bitcoin holdings now account for over 99% of economic value, and traditional software metrics have become a secondary footnote in defining the future cryptocurrency narrative of Strategy.

The above is an analysis of the Strategy Q2 2025 financial report. We will bring more content soon.

This link:

Source: