Marathon Digital (MARA) is among the best performing stocks over the last year, having skyrocketed over 7,000%.
Given the rally in Bitcoin, the surge in Marathon Digital stock is probably not surprising. As a Bitcoin miner, the company seems like a good proxy to owning the cryptocurrency and there is a strong likelihood that the Bitcoin price could remain firm.
A fundamental reason behind this strength is that Bitcoin is priced against the dollar and there is no limit to the amount of dollars that can be printed. On the other hand, Bitcoin has a limited supply.
Recently, Citigroup (C) opined that Bitcoin is “at a tipping point of mainstream acceptance or speculative implosion.”
There is ample data to suggest that Bitcoin is positioned for wider acceptance. For example, Square’s Cash App reported 3 million Bitcoin users in FY2020, and in January 2021, more than one million customers purchased Bitcoin for the first time.
So how does higher Bitcoin price benefit Bitcoin miners like Marathon Digital?
Marathon Digital could decide to sell the mined cryptocurrency and boost its cash position, or it could choose to hold onto the Bitcoin, similar to other assets on its balance sheet.
Factors That Make Marathon Digital Attractive
Marathon Digital has already reported strong top-line growth. For the first nine months of 2020, the company reported revenue of $1.7 million, which was 89% higher on a year-on-year basis. However, cash used in operations was $3.4 million for the same period.
Marathon is positioned to generate positive cash flows in the current year as a result of its expansion plan for the coming quarters.
As of September 2020, Marathon reported 2,060 miners. The company is expecting to deploy 23,560 miners by the second quarter of 2021, which means that its mining capacity will be 11 times higher by Q3. This could have a significant impact on Marathon’s top-line growth in the coming quarters.
Furthermore, Merrick Okamoto, Marathon’s chairman & CEO, is targeting the deployment of 103,060 miners by Q1, 2022. The CEO estimates that based on the current mining rate, a complete deployment could enable Marathon to mine approximately 55-60 bitcoins per day.
Even if the company can only mine 50 Bitcoins per day, revenue growth will be significant. At a current Bitcoin price of $56,000, this equates to over $250 million per quarter, or $1 billion per annum if all the mined cryptocurrency is sold.
Marathon held a $250 million common stock offering in Jan. 2021, of which the company invested $150 million into Bitcoin. The key point is that Marathon has ample liquidity to fund its expansion plan in the next few quarters.
As top-line growth accelerates, the company is expected to turn operating cash flow positive, which should increase its financial flexibility for the next-leg of growth.
A wider adoption of blockchain technology is likely and according to forecasts by Gartner, a leading research and advisory company, blockchain will generate annual business of more than $3 trillion by FY2030. If this holds true, the best part of growth is still to come for crypto companies.
Wall Street Weighs In
Marathon receives a Moderate Buy consensus rating based on a solitary Buy recommendation and a price target of $50 per share. This implies upside potential of around 16% from current levels over the next 12 months. (See Marathon stock analysis on TipRanks)
Amidst these positives, regulatory headwinds could pose potential challenges. India, for example, is considering a ban on cryptocurrency mining and trading while increased regulation of the cryptocurrency market could affect the decentralisation for which Bitcoin was originally intended.
Still, the positives seem to outweigh the concerns and Marathon Digital looks interesting at current levels.
Disclosure: On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.