Will Riot Blockchain Continue To Grow?

Two years ago, a failed medical device maker called Bioptix abandoned its original business, ordered thousands of Bitcoin (BTC 0.84%) mining rigs, and rebranded itself as Riot Blockchain (RIOT 3.62%). At the time, it seemed like Riot was just another company trying to jump on the full Bitcoin and blockchain bandwagon to attract new investors.

However, the soaring price of Bitcoin and the rally in meme shares subsequently pushed Riot’s stock price into single digits to nearly $78 last February. At that peak, Riot was valued at $6.1 billion, or 29 times the $213 million in revenue it would generate in 2021. But today, Riot is trading at around $5 a share with a market capitalization of around $660 million. , minus more than double the revenue it is expected to generate in 2022.

Riot shares collapsed as rising interest rates steered investors away from riskier investments like growth stocks and cryptocurrencies. That exodus caused the price of Bitcoin to fall from a peak of about $65,000 in November to around $20,000 today. That was bad news for Riot, whose entire business and frothy valuations were closely tied to the volatile price of Bitcoin.

But if the Bitcoin price finally bottoms out, could Riot Blockchain stock soar again?

Buy more miners, mine more Bitcoin

Riot’s strategy is simple: raise cash, buy more Bitcoin mining rigs from Bitmain, mine more Bitcoin, and recognize that Bitcoin as revenue. By the end of May, it had deployed a fleet of approximately 43,458 mining rigs with a hash rate capacity of 4.6 exhashes per second (EH/s). The EH/s metric is used to measure the overall efficiency of a Bitcoin miner’s operations.

Riot expects to complete its full deployment of approximately 120,150 miners by January, giving it a hashrate capacity of 12.8 EH/s, so it could nearly triple its scale next year. Riot acquired a large Bitcoin mining facility called Whinstone last year to speed up its expansion.

However, Riot’s main rival, Marathon Digital (MARA 6.80%), has an even more ambitious goal. Marathon’s active fleet of 36,830 active mining rigs had a hash rate capacity of 3.9 EH/s at the end of May, making it slightly smaller than Riot, but it says it hopes to deploy 199,000 miners to achieve a total hash rate capacity of 23.3 EH/s in early 2023.

Is the Riot Blockchain business model sustainable?

In 2021, Riot’s revenue has skyrocketed nearly 18 times and its net loss has shrunk. Its revenue continued to rise in the first quarter of 2022, and it actually turned profitable after selling its stake in Canadian cryptocurrency exchange Coinsquare through a share swap deal with fintech company Mogo (MOGO -2.41%). .

Riot had 6,536 Bitcoins, all of which he had mined himself, at the end of May. Those holdings are worth $132.6 million as of this writing, and he had another $113.6 million in cash on his balance sheet at the end of April. Riot generated a net profit of $7.5 million by selling 250 Bitcoins in May.

Marathon, who initially bought a large percentage of his Bitcoins instead of mining them, had 9,941 Bitcoins, currently worth $201.6 million, as well as $59.6 million in cash at the end of May. However, Marathon’s net losses widened in 2021 and it remained unprofitable in the first quarter of 2022.

Riot ended the first quarter with a surprisingly low debt-to-equity ratio of 0.1. Marathon, which completed a convertible debt offering last year, has a much higher debt-to-equity ratio of 1.0. That lower leverage should give Riot a lot more breathing room than Marathon until the Bitcoin price recovers, assuming it does.

Should you believe the analyst estimates for Riot?

Analysts expect Riot’s revenue to rise 82% this year and then grow another 64% in 2023. They also expect it to remain profitable this year before increasing its earnings per share (EPS) by roughly 70% in 2023.

Based on those expectations, Riot stock looks very cheap at 7 times future earnings. However, investors should take those estimates with a grain of salt because they are tied to the unpredictable price of Bitcoin. Many analysts likely modeled their projections for the company based on higher Bitcoin prices last year, and may not yet have lowered them to account for recent macroeconomic headwinds and the sharp decline in the cryptocurrency market.

However, Riot’s current market cap of around $660 million isn’t much higher than the total assets of $440 million it had at the end of the first quarter. Therefore, its downside potential should be quite limited even if the price of Bitcoin falls further.

Riot is worth buying if you believe in Bitcoin

If you think the price of Bitcoin will recover, I think it’s safer to just buy the cryptocurrency rather than invest in a miner like Riot. However, Riot’s stock could also outperform Bitcoin if that happens, because it will mine more Bitcoins on its own. In other words, Riot is risky, but it is worth buying at these supply levels if you believe in the future of Bitcoin.