Marathon Digital: Risky and Pricey Cryptocurrency Mining Company

Marathon Digital Holdings, Inc. (MARA) is a digital asset technology company that mines cryptocurrencies with a focus on the blockchain ecosystem and the generation of digital assets in the United States. The company was founded in 2010 and is headquartered in Las Vegas, Nevada.

With cryptocurrencies rallying in 2021 and Bitcoin now near all-time highs, many risks make me bearish on MARA stock. (See Insiders’ Hot Stocks on TipRanks)

Business News: The Risk Of Bitcoin Mining Business  

Marathon Digital Holdings has very ambitious goals. On its website, it states that it “aims to build the largest mining operation in North America at one of the lowest energy costs.”

It has a business plan to scale its bitcoin mining business as bitcoin appreciates. At a full capacity of 133,120 miners, the company expects to produce around 13.3 EH/s of hashing power. Marathon aims to achieve this hash rate in July 2022.

Marathon states that it controls its hash rate, the cost of electricity, and corporate expenses. However, it cannot control the price of bitcoin, the price of miners, the block reward and blocks per year, and its network hash rate.

Although China is cracking down on cryptocurrency, and global regulation of the cryptocurrency market is a matter of when not if, there has been positive news related to the cryptocurrency market. For example, the ProShares Bitcoin Strategy ETF (BITO) made its trading debut in late October 2021.

Other Bitcoin ETFs are expected to start trading publicly soon. Nonetheless, this brings a major business risk related to Marathon Digital Holdings. The uncertainty about the future price of bitcoin price.

As a bitcoin miner, Marathon Digital Holdings now has a great concentration risk. If bitcoin’s price tumbles, then this may stop the momentum of MARA stock, having gains of almost 500% in 2021.

In its investor presentation in September 2021, Marathon uses the phrase “Aggressively Scaling Mining Operations To Drive Value”. As long as bitcoin is near its all-time highs of $67,000 or higher, the business news is positive for Marathon. However, the cryptocurrency market has one key feature, it is highly volatile.

Another positive for Marathon is that it is a well-capitalized company. It stated in the investor presentation that it had $70.9 million in cash & 6,695 BTC, for a total of $387.3 million in liquidity as of September 1, 2021. MARA also has “consistent access to capital in the capital-intensive industry with $0 long-term debt.”

Fundamentals: Strong Balance Sheet, Net Losses

From 2016-2020, Marathon has been unprofitable, and in Fiscal Year 2020, it reported a net loss of ($10.45 million) compared to a net loss of ($3.52 million) in the Fiscal Year 2019.

Sales growth is not consistent, and although in Fiscal Year 2020 Marathon reported revenue growth of 267.7%, with sales of $4.36 million compared to revenue of $1.19 million in 2019, it struggles to generate positive operating income or free cash flow. The last time Marathon reported positive free cash flow was back in 2016, with a figure of $8.4 million.

Earnings: Q2 2021 Results Show Divergence in Revenue and Profitability

The Q2 2021 results showed the following highlights:

First, Marathon “increased total revenue to $29.3 million, a 220% increase from $9.2 million in the first quarter of 2021 and a 10,147% increase year-over-year from $286,000 in the second quarter of 2020.”

Second, “Income from operations improved to $4.6 million in the second quarter of 2021 from a loss from operations of $47.1 million in the first quarter of 2021 and a loss from operations of $1.8 million in the second quarter of 2020.”

Third, “Net loss in the second quarter of 2021 totaled $108.9 million, or ($1.09) per diluted share, compared to net income of $83.4 million, or $0.87 per diluted share, in the first quarter of 2021 and a net loss of $2.2 million, or ($0.13) per diluted share, in the second quarter of 2020.”

I also want to focus on another important factor. The company mentioned: “In the first two quarters of 2021, Marathon’s net income was materially impacted by changes in the fair market value of the Company’s investment fund”.

During the second quarter of 2021 it was reported that “due to the price of Bitcoin decreasing from $58,725 at March 31, 2021, to $34,856 at June 30, 2021, the Company’s investment fund incurred a decrease in the fair market value of approximately $114.9 million.”

Marathon’s earnings for the second quarter of 2021 were a big miss, estimated to be $0.16 and reported to be -$1.09.

Valuation: Too Pricey Now

Marathon Digital Holdings now has a price-to-sales ratio of 195x and an enterprise-value-to-sales ratio of 128.4x. Its price-to-book ratio of 2.8x is also higher than the benchmark value of 1x that defines a relative fair value. Also, in 2020 there was a considerable amount of stock dilution.

Wall Street’s Take

Turning to Wall Street, Marathon Digital Holdings has a Strong Buy consensus rating, based on four Buy ratings assigned in the last three months. The average Marathon Digital price target of $62.50 implies 1.4% upside potential.

Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.

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