Riot Blockchain (RIOT) is one of the major publicly-traded cryptocurrency mining companies operating in North America. The company is focused on mining bitcoin by deploying specialized cryptocurrency mining computers (miners).
The way this works is that miners have to solve complex cryptographic algorithms to maintain the Bitcoin blockchain. In return for that (solving a block), Riot receives a bitcoin or other cryptocurrency rewards based on the blockchain. Riot can then either hold these assets or attempt to sell them on the market to generate a profit.
I am neutral on Riot Blockchain. (See Analysts’ Top Stocks on TipRanks)
Chinese Ban Assisting U.S.-Based Miners
Recently, Chinese authorities declared all cryptocurrency transactions illegal. As a result, more than half of Bitcoin’s total hash rate has dropped off the network, making it significantly less difficult for miners to earn tokens. Riot is directly benefiting from this news. The company has been gradually growing its mining capacity, becoming well-positioned to capture the migration of hash rate from China to the United States.
Riot Blockchain further benefits from efficiently using electricity and computing power to produce Bitcoins. The company attempts to sell its proceeds at favorable prices whenever possible. Considering that Bitcoin is currently trading near all-time high levels, revenues should soar.
The Risks
As you may have already guessed, the price of Bitcoin ultimately impacts Riot’s margins and profitability. At the end of Q2 2021, Riot Blockchain was spending approximately $13,814 to earn one unit of Bitcoin. Bitcoin’s second-quarter price levels allowed the company to achieve a profit margin of 70%.
With Bitcoin having rallied by more than 50% from Q2, Riot’s revenues should skyrocket sequentially. Still, we note that Bitcoin’s price fluctuations could adversely impact profitability, especially if the cost of miners continues to go up, driven by the global supply chain hurdles.
Additionally, it’s worth noting that Riot has only eight employees. This places heavy pressure on each employee, considering that this is a $2.8 billion company operating in a rapidly evolving industry.
Finally, future regulation could also negatively impact Riot’s operations, which adds to the business model’s overall speculation. For these reasons, I am neutral on the stock, though I do appreciate the company’s long-term growth prospects.
The Valuation
Riot has a price-to-sales ratio of approximately 12.7 based on its expected revenue in Fiscal Year 2021. Revenue is expected to more than double in Fiscal Year 2022, resulting in a forward price-to-sales ratio of approximately 6. This is a decent multiple for such a fast-growing company.
Furthermore, Riot’s forward price-to-earnings ratio is 25. Again, this is not an expensive multiple considering the company’s potential for margin expansion due to rising bitcoin prices. Still, due to overall risks surrounding the crypto space, it makes sense that Mr. Market remains rather cautious.
Wall Street’s Take
Turning to Wall Street, Riot Blockchain has a Strong Buy consensus rating, based on five unanimous Buys assigned in the past three months. At $46.60, the average Riot Blockchain price target implies 69.8% upside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.
