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Stock Analysis & Ideas

With Significant Growth Potential, Riot Blockchain Seems Undervalued

The first four months of 2022 were challenging for the cryptocurrency industry. Bitcoin has struggled around the $40,000 level. It’s therefore not surprising that Bitcoin mining stocks have also trended lower.

For investors who are bullish on Bitcoin, the correction provides a good opportunity for exposure. Among Bitcoin miners, Riot Blockchain (RIOT) seems to be attractively valued.

RIOT stock has plunged by almost 75% in the last 12 months. Besides the downtrend in Bitcoin, another key reason for the sharp sell-off is equity dilution.

However, I believe that RIOT stock looks undervalued at current levels of $10.40. Gradual accumulation can be considered with the company positioned for significant growth in the next 12-18 months.

Bitcoin Discounting Liquidity Tightening

It’s worth noting that there is no significant negative news for cryptocurrencies from a regulatory perspective. Bitcoin has, however, struggled to stay above $40,000.

One reason for this sideways-to-lower move is the expectation of multiple rate hikes in 2022. With inflation in the U.S. at a 40-year high, liquidity tightening is on the cards. This will impact risky asset classes.

However, even with multiple rate hikes scheduled for 2022, real interest rates will remain negative. This will ensure that money continues to flow into risky asset classes.

Another point to note is that the U.S. might be headed for a recession in 2023. There might be a case for a renewed cut in rates in the next 12 months. Therefore, it might be a good time to accumulate Bitcoin.

Cryptocurrency adoption has been increasing globally. Estimates suggest that the number of crypto holders can swell to over one billion by the end of 2022. With limited supply, Bitcoin is positioned to trend higher as holders continue to increase.

Overall, the long-term outlook for Bitcoin remains positive. The correction in the cryptocurrency and Bitcoin miners, therefore, provides an attractive entry opportunity.

Riot is Positioned for Healthy Growth

Amid the near-term gloom related to Bitcoin’s price, Riot is positioning itself for significant growth. For 2021, Riot reported revenue growth of 1,665% to $213.2 million. For the same period, the company increased hashing capacity by 444% to 3.1EH/s.

Strong growth for Riot has sustained in the first few months of 2022. For March 2022, the company reported 176% growth in Bitcoin production. Further, the company closed Q1 2022 with a hashing capacity of 4.3EH/s.

While growth has been stellar, the best part of capacity addition is still to come. Riot expects hashing capacity to increase to 12.8EH/s by January 2023. This would imply a three-fold growth in hashing capacity compared to March 2022.

It’s worth noting that Riot mined 511 Bitcoin in March 2022. Tripling of capacity would imply that Riot is positioned to mine 1,530 Bitcoin per month beyond January 2023.

Let’s assume a conservative scenario where Bitcoin is trading at $40,000 in January 2023; Riot would be positioned to deliver monthly revenue of $61.2 million at this price. If Bitcoin is trading at $45,000, the monthly revenue potential is likely to be around $69 million.

Therefore, if the expansion is completed on time, Riot is expected to report annual revenue of around $750 million. The revenue can be potentially higher depending on the levels at which Bitcoin trades.

It seems that the best part of revenue and EBITDA growth is still to come. Currently, investors have been focused on the Bitcoin price trend. Once there is a fresh breakout in the cryptocurrency, Riot stock is likely to surge.

From a financial perspective, Riot reported cash and digital assets of $471.9 million as of December 2021. With an expansion in mining activity, digital assets will swell on the company’s balance sheet. There is ample financial flexibility to pursue aggressive growth. Furthermore, if Bitcoin surges again, the balance sheet will look more attractive.

Financial flexibility is important to mention as Riot has pursued inorganic growth in the past. In May 2021, Riot acquired Whinstone, which is North America’s largest Bitcoin mining facility. The company also acquired ESS Metron in December 2021. The latter is a provider of highly-engineered electrical equipment solutions.

Risk Factors

Given the financial flexibility, the balance sheet risk seems to be low. The company has ample funds and financing options for aggressive growth through 2023.

Bitcoin trending lower is another risk factor. However, it’s worth noting that the cryptocurrency has been in a broad consolidation range. Even with news on inflation and prospects of multiple rate hikes. In all probability, the worst of the downside is likely over.

There is also a possibility of escalation in energy price, which can impact the gross margin per Bitcoin mined. However, in the next few quarters, this risk is likely to be largely offset by an increase in Bitcoin price.

Bitcoin halving is also due in 2024, and it will make mining more difficult. Again, this point is publicly known and is discounted in the current stock price.

Wall Street’s Take

Turning to Wall Street, Riot has a Strong Buy consensus rating, based on three Buys and one Hold rating assigned in the past three months. The average Riot Blockchain price target of $43 implies 315.5% upside potential.

Bottom Line

The worst of the downside seems to be over for Riot stock. It might be a good time to accumulate around these levels.

If Riot can ramp up its mining capacity to 12.8EH/s by January 2023, the stock would see a strong reversal rally.

However, considering the volatile nature of cryptocurrency as an asset class, the exposure to the stock should be prudent.

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