At first glance, the meteoric rise of blockchain mining specialist Marathon Digital (MARA) provides an inspiring backdrop for speculators. Knowing that cryptocurrencies can spark dramatic valuation spikes at a moment’s notice, Marathon seems like an attractive buy. However, this unpredictable nature also makes it inappropriate for arguably most investors. I am bearish on MARA stock.
As a mining enterprise, Marathon Digital is tied to the ebb and flow of bitcoin (BTC-USD) prices, which simultaneously represents both the opportunity and the pitfall of MARA stock. On the one hand, when cryptos soar, there are very few markets that deliver a similar magnitude of profitability over a relatively short period of time. On the other hand, the lows in this arena can be catastrophic.
Given such extreme variability of outcomes, it’s tough to pinpoint where cryptos might end up. For instance, many experts on virtual currencies have weighed in, suggesting that bitcoin could rise to $28,000 by the end of 2022, representing a 21.5% lift from the time-of-writing price.
However, other experts are less confident about bitcoin’s trajectory. It wasn’t that long ago that the crypto sector melted down. Not only that, bitcoin is down roughly 52% on a year-to-date basis. With so many possibilities for the underlying digital assets, MARA stock lacks much-needed predictability.
MARA Stock and Its Dependency on Bitcoin
As stated above, one of the pivotal contributors toward speculation in MARA stock is the ability to deliver extraordinary returns based on the wild movements of the crypto sector. For instance, Marathon shares jumped 102% over the trailing month ended Aug. 1. During the same period, bitcoin increased by nearly 19%.
Aside from the point that speculators in MARA stock may be moving well ahead of bitcoin’s technical momentum, Marathon is essentially married to the crypto sector’s fortunes. When digital assets rise, they typically carry the mining industry with them. When they fall, red ink hemorrhages everywhere.
Marathon’s financials are hampered by a feast-or-famine business model. In 2016, the company posted a then-record revenue tally of $36.6 million. However, between 2017 and the end of 2020, top-line sales slipped to an average of $1.93 million.
Of course, when bitcoin and other digital assets ballooned to record valuations last year, Marathon tagged along for the ride, generating revenue of $150.5 million in 2021. Unfortunately, with first quarter 2022 sales slipping over 14% from Q4 2021’s revenue total, it’s clear that bitcoin’s collapse this year has had a materially negative impact on MARA stock.
Even the Minutia is Problematic
While year-to-year comparisons between MARA stock and the bitcoin price reflect significant correlations, Marathon’s financial trajectory also tracks bitcoin throughout the seasons. In other words, even in the minutia, the mining firm (and the mining business overall) carries significant risks.
For instance, in Q1 2021, Marathon delivered net income of $83.4 million, a rarity for a company accustomed to printing annual net losses. However, by the following quarter, Marathon posted a staggering net loss of $108.9 million. In the middle of Q2 last year, bitcoin stumbled badly. It wasn’t until Q4 that BTC was trading again at record prices.
Thus, in Q3 2021, Marathon posted another net loss, to the tune of $22.2 million. Again, if bitcoin and other key cryptos aren’t delivering the goods, Marathon’s financials suffer. That’s not an encouraging prospect for MARA stock, as management can’t do much aside from hope that the crypto sector cooperates.
Wall Street’s Take on MARA
Turning to Wall Street, MARA stock has a Moderate Buy consensus rating based on five Buys, two Holds, and no Sells assigned in the past three months. The average Marathon Digital price target is $20.14, implying 53.2% upside potential.
Marathon Stock is Held Hostage by Speculation
While the concept of a publicly traded company tethered to the trading dynamics of cryptos appears to be an enticing proposition, the reality is that businesses like Marathon are held hostage by pure market dynamics. Should bitcoin not cooperate, MARA stock could be in for a world of hurt, as prior financial performances indicate. As a result, investors should be leery about overexposure because nothing has likely changed this year.