July 3, 2022

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Beauty Made Perfect

Better Bitcoin Stock: Riot Blockchain vs. Marathon Digital Holdings


Riot Blockchain (RIOT -9.61%) and Marathon Digital Holdings (MARA -5.78%) are both Bitcoin (BTC 4.15%) mining companies. Both originally operated completely different businesses before pivoting toward Bitcoin mining.

Riot was originally a medical device maker called Bioptix, but it abandoned that business four years ago and ordered Bitcoin mining equipment. Marathon was initially a patent holding company that generated most of its revenue through licensing fees, but it also rebranded itself as a Bitcoin mining company in 2020 and ordered mining equipment.

Those transformations were abrupt, but shares of Riot and Marathon skyrocketed as Bitcoin’s price rallied toward an all-time high of over $68,000 last November. However, Bitcoin’s price subsequently tumbled to about $31,000 (as of this writing) as rising interest rates drove investors away from riskier stocks and cryptocurrencies — and both stocks crashed.

Could Riot and Marathon stage a comeback this year if Bitcoin’s price stabilizes? Let’s reevaluate their businesses and valuations to find out.

An icon of a Bitcoin on a trading screen.

Image source: Getty Images.

The similarities and differences

Riot and Marathon both placed massive orders from Bitmain, the world’s largest producer of ASIC miners, to build their mining fleets. They both generate most of their revenue in the form of Bitcoin from those mining operations. Riot’s mining operations are currently larger than Marathon’s, but Marathon expects to overtake Riot with a larger fleet next year.

Riot had deployed 46,375 miners by the end of April, and it expects to deploy approximately 120,150 miners by January. It expects its total hash rate capacity — which measures the efficiency of its mining operations — to increase from 4.7 EH/s (exahashes per second) at the end of April to 12.8 EH/s once it completes its full deployment.

At the beginning of May, Marathon’s fleet consisted of 36,830 active miners with a hash rate of 3.9 EH/s. It plans to deploy 199,000 miners to generate a total hash rate capacity of 23.3 EH/s by “early 2023.”

The companies face similar challenges

Riot and Marathon both generated explosive revenue growth last year as they deployed more miners and Bitcoin’s price soared.

Company

Revenue 2020

Revenue 2021

Revenue Q1 2022

Riot Blockchain

$12.1 million

$213.2 million

$79.8 million

Marathon Digital

$4.4 million

$150.5 million

$51.7 million

Data source: Company earnings reports.

However, both companies face slower growth in 2022 as Bitcoin’s value dips. For 2022, analysts expect Riot’s revenue to rise 88% to $402 million and for Marathon’s revenue to increase 236% to $506 million — but those estimates are shaky because they’re tethered to Bitcoin’s volatile price.

Bitcoin’s price has been declining, but energy costs have been rising. Riot and Marathon are both trying to mitigate those costs by increasing their scale: Riot acquired a large Bitcoin mining facility called Whinstone last year, and Marathon launched a joint venture with energy company Beowulf to operate its data centers at favorable rates in Hardin, Montana.

Marathon remained unprofitable over the past two years, but Riot narrowed its net loss in 2021 and turned profitable in the first quarter of 2022.

Company

Net Income 2020

Net Income 2021

Net Income Q1 2022

Riot Blockchain

($12.7 million)

($7.9 million)

$35.6 million

Marathon Digital

($10.4 million)

($36.2 million)

($13.0 million)

Data source: Company earnings reports.

Riot’s net profits were significantly boosted by its divestment of  Canadian cryptocurrency exchange Coinsquare via a share-swap deal with fintech company Mogo.

Analysts expect Riot to stay profitable with a net profit of $96 million this year. They also expect Marathon to generate a net profit of $65 million. But once again, these estimates rely heavily upon the stabilization of Bitcoin’s prices.

Which Bitcoin miner is the better investment?

Riot and Marathon both trade at about 10 times forward earnings, and both stocks could recover if Bitcoin’s price rebounds. But if I had to choose one of these miners over the other, I’d pick Riot — even though it’s growing a bit slower than Marathon and has less ambitious targets for its mining fleet — for two reasons.

First, Marathon’s aforementioned deal with Beowulf has been the target of a Securities and Exchange Commission probe since last November. If it’s forced to abandon that joint venture, its energy costs could surge. Second, Riot’s debt-to-equity ratio of 0.1 is much lower than Marathon’s ratio of 1 — which was boosted by a big convertible debt offering last year.

Even so, Riot is still a speculative, all-in bet on Bitcoin. I think it’s smarter to simply buy Bitcoin instead of investing in a capital-intensive miner, but Riot’s business could continue growing if Bitcoin stabilizes.

 





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