The pivot to cryptocurrency has proved lucrative for Marathon Digital Holdings (NASDAQ:MARA) stock. The recently-renamed company (formerly known as Marathon Patent Group) has been one of the market’s biggest winners over the past year.
In fact, of nearly 8,000 stocks on U.S. exchanges, MARA has been the third-best performer over the past twelve months. It’s narrowly bested fellow Bitcoin (CCC:BTC-USD) miner Riot Blockhain (NASDAQ:RIOT). Only MicroVision (NASDAQ:MVIS) and, at least for now, GameStop (NYSE:GME), have done better than MARA’s 5,028% return.
Of course, the rise in Bitcoin, which itself is up over 500% over the past year, has been a major catalyst, but the divergence between gains in BTC and in MARA stock show that something else is at play.
MARA’s outperformance may be due to investors properly understanding the company’s potential. It may be a result of something close to a bubble in crypto plays (and maybe even crypto itself).
Which it is largely will depend on the answers to three key questions.
Can This Business Create Nearly $3 Billion in Value?
It’s important to remember that, at the moment, Marathon Digital doesn’t have much of a business.
It has a plan, certainly. Figures from a recent press release suggest 2,620 S-19 miners are operational at the moment, with the fleet expanding to nearly 13,000 by the end of this month.
But that’s really about it. Through the first nine months of 2020, Marathon generated just $1.7 million in revenue. A January purchase of Bitcoin has unrealized gains of roughly $100 million, and Marathon has sold about $450 million in stock over the past few months.
Back out the cash and the Bitcoin holdings, and the operating business still is valued at about $3 billion. It’s fair to wonder, broadly speaking, if this business plan can actually create that kind of value.
After all, nothing that Marathon is doing is particularly innovative. An agreement to locate the servers in Hardin, Montana does provide a potential source of low-cost energy which can improve profit margins. That aside, Marathon is just buying miners from a third party.
Yes, the company is buying a lot of miners, and perhaps the explanation is that Marathon simply stumbled into an idea when few others did. Marathon didn’t pivot to Bitcoin mining just because it saw an opportunity. It pivoted because its former business as a “patent troll” didn’t work. Nor did a short-lived venture into uranium (a sector that was “hot” at the time) early last decade.
Maybe Marathon was just in the right place at the right time, but bear in mind that MARA stock is valuing each of the company’s 103,060 miners at more than $29,000. The newest S-19 Pro miners acquired most recently retail for as little as $10,000 each.
Can Marathon Get Around the Difficulty Rate?
In a January presentation, Marathon estimated that its current fleet could produce 55-60 Bitcoin per day. Even the low end of that daily range suggests Marathon could generate annual revenue clearing $1 billion. Gross profit would clear $900 million.
Those kinds of numbers can indeed create $3 billion in value in a hurry. But there’s a catch: the so-called “difficulty rate.”
The difficulty rate, as the name suggests, essentially measures how difficult it is to mine bitcoin. It rises over time.
Marathon does clarify in the presentation (and in press releases) that the difficulty rate is not static. As long as it keeps rising, the potential rewards for the same amount of computing power decline.
Low-cost competition in China suggests that the rising trend in difficulty rate will continue. So does a massive backlog for manufacturer Canaan (NASDAQ:CAN).
If difficulty does continue to rise, Marathon’s profits aren’t nearly as spectacular as the current environment suggests. That doesn’t necessarily mean MARA stock collapses, but it does limit the leverage of the company’s earnings to the price of Bitcoin.
Is RIOT a Better Play Than MARA Stock?
If an investor can satisfactorily answer these two questions, there’s a third: in Bitcoin mining, is MARA the best play?
Perhaps. But there’s a case for the rivals as well. CAN has seen its own massive rise, but presumably has a long-term demand tailwind from the likes of Marathon and Riot Blockchain, not to mention smaller customers worldwide.
Meanwhile, Riot Blockchain has followed largely the same playbook, and by at least one measure, it should be ahead. Marathon has said that once its recently-ordered miners are installed, its fleet will produce 1.4 EH/s (exahash per second) by the end of the month. Hashes are the sums used to solve the mathematical puzzles that underlie Bitcoin mining.
Riot, however, is targeting 3.8 EH/s by the end of October. Presumably, Marathon will have its own improvements, but Riot at least on that metric does seem to be ahead.
To be sure, that doesn’t mean that Riot should be worth more than double Marathon. Electricity prices, in particular, are a key variable. But given that Riot and Marathon have roughly the same market capitalization, it’s fair to ask if Bitcoin bulls can do better than MARA stock, even if they believe in Marathon Digital.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
