The analyst who wrote this piece owns shares of MicroStrategy (MSTR).

Since MicroStrategy (MSTR) became a bitcoin tax company in August 2020, it has used three primary instruments to acquire bitcoin (BTC): cash on hand, at-the-market (ATM) offerings, and convertible bond offerings.

MicroStrategy’s next method of raising capital is to buy bitcoin through perpetual preferred stock, which was announced to the market on January 3rd. MicroStrategy has announced a $2 billion capital raising through one or more offerings, according to Benchmark.

Benchmark hosted a recent investor meeting with MicroStrategy Executive Chairman Michael Saylor at the ICR conference in Orlando to discuss the perpetual preferred stock offering.

A perpetual preferred stock typically has no fixed expiration date and continues indefinitely unless the company chooses to redeem it or set an expiration date on it. Shareholders of the stock receive fixed dividend payments, but have no voting rights. The company may have the right to buy back the share at a predetermined price after a certain date. In the event of a liquidation event, perpetual preferred stockholders are paid before common stockholders but after debt holders.

Perpetual stock is an attractive instrument due to the lack of a set maturity date, unlike MSTR’s convertible bonds, where some are already in the money and eligible for conversion. Convertible bonds tend to have maturities of about four to eight years, Saylor said at the conference.

According to the memo, Saylor said the perpetual preferences were advantageous because of their extended duration. The instrument acts as an embedded, indefinite call option in addition to a one-time principal payment. The company would benefit as it would be less fragile due to the extended duration of the capital structure.

According to Benchmark, the perpetual preferred stock could achieve a mid-single-digit return with low volatility and the market without options, the opposite of a convertible bond.

Perpetual Preferences would be attractive to large institutions such as pension funds and banks as they would receive a stable and fixed dividend payment.

The terms of the perpetual preferred stock have not yet been announced. We know this is coming in the 1st quarter and the terms of the offering should include dividend payments, convertibility to Class A shares and delivery of redemption shares, according to the January 3rd MicroStrategy press release.

Benchmark maintains its buy rating on MSTR with a price target of $650.

As of Monday, MicroStrategy bought an additional 2,530 BTC, bringing the total holdings to 450,000 BTC.

Next week, MicroStrategy’s special meeting of shareholders will take place on January 21st. Investors will vote to increase the authorized Class A stock and preferred stock. MSTR’s Q4 earnings call is set for February 4.