Bitcoin (OTC:BTC-USD) miners are all the rage these days. Investors in Riot Blockchain (NASDAQ:RIOT) stock have ridden this stock to new recent highs of late.
Indeed, the price of Bitcoin has spurred a flurry of investment in everything blockchain-related.
Miners like Riot have been given a lot of attention as “picks and shovels” plays on the sector.
These miners do the dirty work behind the scenes to make cryptocurrencies run. Accordingly, they are rewarded in Bitcoin and transaction fees to verify the blockchain.
Let’s take a look at why Riot is surging right now, and whether investors should think about owning this stock.
Good News Driving RIOT Stock Right Now
Riot has been on the rise of late, in part due to a very bullish announcement this week.
The company announced it produced 304 Bitcoin during the first two months of this year. This exceeded the entire amount produced in all of Q4.
Importantly, the company also highlighted the expected improvement in the company’s hash rate (productivity rate). This improvement was related to increased capacity stemming from the company’s purchase of 1,500 S19j Pro Antminers for Bitmain. The company expects to have these machines delivered in October of this year.
Riot Blockchain’s most recent financial results also highlighted strength in the company’s margins as well as meaningful top-line growth. Revenue grew by 21%, while margins expanded to 38% which is a key factor many investors were expecting to see.
Given where Bitcoin prices are today, it’s expected the company’s next quarterly earnings release will show substantially improved numbers. Indeed, RIOT stock is factoring in a ton of growth and margin expansion. It appears investors believe Bitcoin prices are likely to remain elevated and are valuing RIOT stock accordingly.
Most investors would agree the company’s valuation multiple of 530-times sales is astronomically high. There’s a great deal of optimistic sentiment driving these shares to these levels. Accordingly, investors need to be aware of the risks involved in such stocks today.
Risks Do Exist, So Trade Carefully
As with any investment, those putting their hard money to work in a given stock need to assess the level of risk they’re taking.
In the case of Bitcoin miners like Riot, the most prevalent risk right now is related to the price of Bitcoin. I would argue the valuation of RIOT stock is directly correlated to expectations of where Bitcoin prices are headed. Indeed, there are some pretty bold predictions out there for where prices could be headed in the years to come.
I have no idea what Bitcoin will be worth five minutes, five days, or five years from now. The volatility with Bitcoin is astronomical. Accordingly, the volatility miners will see in the near future is something that ought to preclude conservative investors from this asset class right now.
If (and it’s a big “if”) Bitcoin prices can stabilize and continue to climb in a low-volatility fashion from here, maybe the case can be made that RIOT stock is worth a shot.
Where to Go From Here?
Personally, Bitcoin itself, and the Bitcoin miners that power the blockchain underpinning cryptocurrencies, are too volatile for my blood.
However, I can understand the intrigue of these stocks for those with a high risk tolerance and short-term investing time horizons. There’s a great deal of momentum in this sector right now. That can’t be disputed.
That said, RIOT stock is one that is also too richly valued for my blood. At 530-times sales, this stock is perfectly priced. Everything needs to go right in order for investors to see capital appreciation here.
In other words, Bitcoin essentially needs to go to the moon in order for investors to break even right now. Any way you dice this stock, I don’t see a fundamental rationale for ownership.
Then again, Bitcoin could indeed continue its run and render all fundamental analysis worthless.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.
