Marathon Digital Holdings (NASDAQ:MARA) stock, formerly known as Marathon Patent, has found big success with its shift from patent trolling to Bitcoin (CCC:BTC-USD) mining. But, while this has resulted in outsized gains for MARA stock, should investors be concerned?
Yes and no. On one hand, it’s obvious Marathon is overvalued. While it has big potential once it gets all of its crypto mining hardware online, it’s questionable whether this potential warrants Mr. Market’s current valuation for the company ($3.3 billion).
On the other hand, betting against this stock, while crypto remains red hot, looks like a fool’s errand. There are two things that could push this stock lower from here in the near-term. First, of course, is a big decline in Bitcoin prices. But, given BTC has bounced back after its recent sell-off, it’s too early to say whether another “crypto crash” is imminent.
The second thing that could knock down this stock is underwhelming financial results. Investors will bail if it becomes clear Marathon Digital can’t live up to today’s promises. However, with this possible outcome months away, don’t count on this to knock down shares anytime soon.
So, with shares overvalued, but investor sentiment in its favor, what’s the best move? If you want crypto exposure, stay away from from this stock. Buying the underlying cryptocurrencies is the less risky move.
MARA Stock: Priced for Perfection
As I said above, Marathon Digital is overvalued. Even when you assume its plan to mine 55-60 BTC per day goes off without a hitch, today’s share price more than factors in its potential. But, as our own Matt McCall wrote last month, the “difficulty rate” of mining Bitcoin going forward could affect to what extent the company lives up to this projection.
Based on numbers provided in the press release on its mining plans, the company estimates its mining costs at $4,541 per BTC. Yet, if the difficulty rate rises, so will this cost per BTC.
Crypto mining may sound like a license to print money. But, when you take a look at the details, it’s really not. As InvestorPlace’s Chris Markoch discussed Feb. 23, crypto mining is a capital-intensive business. To live up to its current valuation, it will have to invest massively in building out its crypto mining operations.
This alone doesn’t mean bad news ahead for Marathon Digital, as long as Bitcoin prices continue to near-record highs. But, what happens if prices fall back to prior levels? I’m not talking about a dip back to $40,000 per BTC. I’m talking about a big crash, a move back to prices well below $20,000 BTC.
For those buying Bitcoin today, this is a scenario which would result in losses of 60% or more. But, just like how MARA stock made outsized moves when BTC soared, this stock would likely make outsized moves lower if the BTC price took a big dive.
In short, buying this secondary crypto play looks like a riskier move than buying the underlying cryptocurrency itself. Yet, while the risk/return proposition means this isn’t a great stock to buy, don’t consider it a great stock to short, either. Why? As cryptos remain hot, so will this stock.
Irrational Prices Wave-off Bets Against
On March 1 alone, MARA stock soared 27.7%. Why? Most of it was likely due to BTC starting to rebound, after its late February slide. But, factors like the company’s recent name change could have played a role as well. Putting it simply, it’s speculative mania from retail investors as much as Bitcoin surging price itself that driving action in this stock.
In turn, that’s why betting against Marathon Digital shares (by shorting them) doesn’t look like a wise move right now. In the end, those bearish on the stock could be vindicated. Like many times before, this over-hyped stock is likely to eventually stumble in a big way.
Whether that’s from another crypto market crash or from the company failing to live up to the high expectations fueled by its press releases. Either way, the odds of this stock tumbling are greater than the odds of it continuing to compound in the coming years.
The issue? Timing. You could go out today and short MARA stock at $39 per share. But, if its way before shares top out, you can wind up with heavy losses, and even heavier regret.
Buy Cryptos, Not Miners
It’s never been easier for investors to buy crypto. So, why buy Marathon Digital shares, which are arguably a riskier investment? Yes, its stock price could continue to climb, as speculation rather than fundamentals continues to drive price action.
But, if crypto prices crash, expect MARA stock to make larger declines than Bitcoin itself. With this in mind, sticking to cryptos directly remains the best play.
On the date of publication, Thomas Niel held a long position in Bitcoin.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.