Marathon Digital Holdings (NASDAQ:MARA), the Bitcoin mining company, announced its earnings Tuesday for both the fourth quarter and 2020. But it also updated the market on the amount of cash and Bitcoin it held as of March 15. As a result of the company’s decision to hold all the Bitcoin that it mines, expect MARA stock to increasingly be a leveraged play on Bitcoin’s price moves.
For example, Marathon Digital Holdings (formerly known as Marathon Patent Holdings) generated 254 Bitcoins during the Q1 quarter thr4ough March 15 from its mining operations, and it held on to them.
It can do this for three reasons.
First, the company generates Bitcoin at 90% margins, according to the earnings release. The $14.3 million of Bitcoin mentioned in the earnings release cost only $1.43 million. That represents 82.4% of the full quarter, so the run-rate cost is $1.735 million per quarter or about $6 million per year.
Second, the company has an extremely low power cost structure, at just 2.8 cents per kilowatt-hour (kWh). Given that the company is expanding out its mining operations with more Bitcoin mining processors or ASICs (application-specific integrated circuits), this means its margins could actually rise above 90%.
Third, the company has $219 million in cash. So even if it “burns” off $6 million or $7 million in costs, it can afford to simply draw down that cash balance. Meanwhile, it will continue to collect (rather than sell to cover costs) the Bitcoins it mines each day. And why not? Bitcoin has done extremely well over the past year, and there is every indication that could continue.
Valuing Marathon Digital
Marathon said in the press release that it expects to more than double the number of ASIC miners from 5,690 to 12,331 by the end of the year. These tend to be much more profitable and efficient than the typical GPU and CPU type mining computers.
But more importantly, the company said it now has 103,120 miners of all types that can produce 10.37 exahash per second by the beginning of 2022.
In a prior article Marathon’s CEO indicated that Marathon could mine 55 to 60 Bitcoin per day, once all its digital miners are in place. That implies, at $55,000 per Bitcoin, the company’s revenue would be $3.3 million per day. At 90% gross margins, the margin would be $2.97 million per day or $1.081 billion annually. Assuming a 2% operating cost, net income would be $1.0595 billion.
Using a 5 times multiple, the value of the business would be $5.297 billion. In addition, the company now has $271 million worth of Bitcoin on its balance sheet as of March 15, as well as $219 million in cash. Therefore its total cash and securities is $490 million.
As a result, Marathon Digital Holdings has a value of $5.797 billion. Since there are 81.9746 million shares outstanding as of Dec. 31, 2020, the value per share is $70.60. This is 68% above the company’s $41.90 opening price on March 18.
What Will Happen With MARA Stock
What this means is that MARA stock will move significantly more or less than the price of Bitcoin over time. For example, let say that Bitcoin doubles over the next year. That would increase the company’s margins significantly, and the 60 Bitcoins it produces each day would result in $5.94 million per day and $2.162 billion annually. Its operating costs would lower this to just $2.142 billion.
Therefore at 5 times earnings, the value of MARA stock would be $10.71 billion. In addition, the Bitcoin it mined would be worth $2.4 billion, and the Bitcoin it owns now would be worth $540 million. Plus it would have about $200 million in cash. So its total value would be $3.142 more, or $13.852 billion total.
That works out to $168.98 per share or 139% more than the previous calculated value of $70.60. In other words, as Bitcoin rises, the leverage effect on its valuation is 1.39 to 1.0. However, its leverage effect on the stock price is even greater.
For example, the present value of $70.60 is 68% above today’s price. But it Bitcoin doubles, the leverage effect on today’s price is 440% (i.e., $169 divided by $38.55 today). That shows that the leverage effect on MARA stock is over twice (440% minus 200%, or 240%) the gain or loss in Bitcoin’s price.
This works on the downside as well. So think of MARA stock as a leveraged play on Bitcoin’s performance. It is presently worth 68% more at $70.60 than its price today, but if Bitcoin rises the valuation differential expands exponentially.
On the date of publication, Mark R. Hake holds a long position in Marathon Digital Holdings (MARA).