Should MSTR be Included in S&P500? Strategy Passed Over Again

MSTR +3.80% ^SPX +0.85% SNDK -0.66%

Key Takeaways

• By market capitalization, Strategy is one of the largest firms in America.

• However, it continues to be excluded from the S&P500.

• Most stock indexes disqualify firms that resemble investment funds.

When S&P announced quarterly index updates on Monday, Nov. 24, Strategy (formerly Microstrategy) was overlooked once again in favor of flash memory maker SanDisk, which will join the S&P 500 from Friday.

The snub comes at a bad time for Strategy, which also faces the prospect of being booted from MSCI’s USA benchmark.

S&P Gives Strategy the Cold Shoulder

Despite ranking among the 250 most valuable companies in the United States, Strategy has never been included in S&P’s flagship benchmark.

When determining which companies belong in the index, market capitalization isn’t the only factor taken into account; S&P’s Index Committee makes decisions based on multiple qualitative and quantitative criteria.

Strategy’s omission from the S&P 500 is in line with longstanding norms. The Index Committee has traditionally avoided admitting companies whose primary income streams are generated from pure asset exposure, rather than operating fundamentals.

By the same token, holding companies and conglomerates are also often excluded on the grounds that they function more like investment funds than operational businesses.

MSTR Could be Kicked off the MSCI Benchmark

In an October note to investors, JPMorgan reported that MSCI was consulting on “the appropriate treatment of companies whose primary business involves Bitcoin or other digital asset treasury activities.”

Like S&P, MSCI tends to disregard firms that resemble financialized investment vehicles.

To prevent digital asset treasuries (DATs) from distorting the sector weighting of its benchmarks, the firm has proposed excluding companies whose crypto holdings represent 50% or more of their total assets, JPMorgan said.

Michael Saylor Responds

Responding to the proposal, Strategy Chairman Michael Saylor insisted the company “is not a fund, not a trust, and not a holding company.”

“We’re a publicly traded operating company with a $500 million software business and a unique treasury strategy that uses Bitcoin as productive capital,” he said.

Despite his intention, Saylor’s comments somewhat validate the notion that Strategy shouldn’t be included in stock indexes. 

Based on software revenues alone, the company doesn’t even come close to qualifying for inclusion in major benchmarks.

Companies in the MSCI USA and S&P 500 indexes typically generate tens of billions of dollars at least each year, and they almost never report net losses.

Although Saylor asserted that “no passive vehicle or holding company could do what we’re doing,” the market clearly treats MSTR as a Bitcoin proxy.

Based on established precedent, this makes it inappropriate for indexes intended to reflect productive economic activity.

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