Why Strategy Stock Is Plummeting Today

Shares of Strategy (NASDAQ: MSTR) are trading lower on Tuesday. The company's stock lost 11.7% as of 12:25 p.m. ET and had lost as much as 12.6% earlier in the day. The drop comes as the S&P 500 (SNPINDEX: ^GSPC) lost 0.9% and the Nasdaq Composite (NASDAQINDEX: ^IXIC) lost 1.6%.

Strategy, known as MicroStrategy until earlier this month, announced on Monday that it had completed its private offering, raising $2 billion in capital, which it used to buy additional Bitcoins.

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A bold strategy

The company purchased 20,356 Bitcoins at an average price of $97,514. Its total reserves now amount to just shy of 500,000 Bitcoins, representing more than 2% of all Bitcoins that will ever be mined.

Under the guidance of Bitcoin advocate and Strategy executive chairman Michael Saylor, the company is amassing as many Bitcoins as it can. To do so, however, the company has had to take on significant debt. The strategy could pay off if Bitcoin continues to appreciate significantly, but there is certainly no guarantee of that happening.

This means that any major movements in Bitcoin tend to affect the company's stock price. Today's sharp decline in Bitcoin's price helped drive Strategy's drop.

Valuation woes

Even if Bitcoin continues its rise, Strategy's stock is still likely to struggle in the long term. There is a lot of hype around the stock, and much of its current price already has significant future Bitcoin growth baked in. The company's price-to-sales ratio (P/S) is very high at nearly 120.

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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.