Marathon Patent Group (NASDAQ:MARA) is deeply undervalued. Based on a sum-of-the-parts (SOTP) analysis, I believe that MARA stock is worth at least double its present price.
When we add up all the parts of this Bitcoin miner, including its cash, its holdings in Bitcoin, and its Bitcoin mining operation, we get more than the present market cap by at least 120%.
This is despite the meteoric rise in MARA stock over the past year. For example, the stock has risen over 18.7 times in the past year. So far this year it is up 90.6% alone. If my analysis is correct, I suspect you will see another doubling in MARA stock, if not more.
SOTP Analysis of MARA Stock
On Jan. 26, Marathon Patent Group issued a 6-K filing (because it is at heart a Chinese company with headquarters in Las Vegas) that was very informative. The filing was from an article in a magazine called The Block. The article is the basis of my SOTP analysis.
The article goes on to quote CEO Merrick Okamoto explaining not only the economics of its business but also its balance sheet. This is how I was able to put a sum-of-the-parts valuation on the company.
First, let’s look at the balance sheet. Okamoto indicated that the company recently bought 4,813 Bitcoin for $150 million. The cost was $31,135 per Bitcoin. Here’s the good news: As of today, the price of Bitcoin is approaching $35,000.
Moreover, the article indicates that Marathon still has another $100 million from $250 million it recently raised, as well as $450 million in other cash on its balance sheet. Therefore, its liquid assets are $163.8 million in Bitcoin plus $550 million in cash, or $$713.8 million in total.
But that does not include the value of its Bitcoin mining operations. Considering recent purchases, Okamoto estimates that Mathon will be the largest Bitcoin mining operation in the world. This is based on the operation producing a hash rate of 10.34 exahash when all its equipment is fully installed.
What the Mining Operation Is Worth
He gave enough information to put a value on that business. For example, he said that going forward the company would mine approximately 55 to 60 Bitcoin per day using its advanced mining computers. At today’s price, that is worth $2 million per day.
In addition, he said that the electricity cost would soon fall to 2.8 cents per kilowatt-hour (kWh). In effect, this lowers the cost per Bitcoin from over $7,000 to less than $4,400. So, the cost would be just $264k for 60 Bitcoin per day. Therefore, its gross operating margin will be $1.736 million per day.
If the price of Bitcoin rises, the margin would rise as well, meaning that it will soon be on a run rate of gross profits of $631.9 million per year. Assuming a 5% operating cost (it is essentially a three to five-man operation), we can estimate $600 million in run-rate profits or free cash flow.
Assuming 20% net tax, the net income will be $480 million annually. Therefore at just six-times earnings MARA stock would be worth $2.88 billion. In addition, we will add in the $750 million in Bitcoin and cash. The total SOTP value is $3.63 billion.
What MARA Stock Is Worth
This is about twice its present $1.87 billion (approximate) market value. The market could easily value the mining operation at a five- or 10-times multiple.
In other words, MARA stock is worth at least around 95 % more than its $20.74price today, but it could be substantially higher.
For example, keep in mind that as the price of Bitcoin rises (which is highly likely) both its treasury holdings rise in value as well as its gross margins.
So this SOTP value is an approximate value, but we can pretty confidently say that MARA stock is worth at least twice its present price. Look for MARA stock to rise over the next year.
On the date of publication, Mark R. Hake did not hold a long or short position (either directly or indirectly) in any of the stocks in this article.