Riot Blockchain (NASDAQ:RIOT) is a $3.6 billion market cap Bitcoin (CCC:BTC-USD) mining company based in Castle Rock, Colorado. For all intents and purposes, RIOT stock is a play for investors on Bitcoin’s rise without having to buy the cryptocurrency.
That means investors will ride the ups and downs in Riot, more or less mimicking Bitcoin’s volatility.
The company also has other operations such as accounting, audit and verification services for blockchain-based assets, such as cryptocurrencies. It also is developing TessPay, a payments ecosystem for supply chain settlement solutions, and other blockchain solutions for telecom companies.
Analysts surveyed by Seeking Alpha expect revenue will hit $10.4 million this year but expand dramatically to $158.6 million by the end of 2021. The company certainly looks on track to reach this huge growth rate.
For example, on Feb. 11, Riot Blockchain announced that its latest deployment of next-generation miners from Bitmain will triple its capacity by the fourth quarter. The company now says that with the deployment of its new 2,002 S19 Pro Antminers, Riot will have a total of 11,542 Antminers in operation. It also has an additional 26,100 S19 Pro and S19j Antminers on order with Bitmain. They should arrive by October.
The 2002 S19 Pro Antminers give Riot a total mining capacity of 1.06 exahash per second (“EH/s”). But with the additional miners on order, it will have a total of 37,642 Bitmain Antminers. This will give it a total capacity of 3.8 EH/s. This means that its mining capacity will be 3.58x its present rate of production.
Just to keep this in perspective, here is what one exahash means. A hash is a computation function used to determine a segment or hash of a blockchain. One terahash per second equates to one trillion hashes computed per second (i., a 1 with 12 zeros behind it). A petahash is one quadrillion hashes per second (1 with 15 hashes behind it). One exahash is the next step up, with one quintillion hashes per second (a 1 with 18 zeros behind it).
Therefore, an exahash is equal to one million terahashes (trillion) computed per second.
The company has not yet released results for 2020. I believe management, along with new CEO Jason Less, who was appointed on Feb. 8, will focus even more intently on its Bitcoin mining operations.
What To Do With RIOT Stock
There are not many analysts covering RIOT stock yet. TipRanks and Marketbeat report that there is just one analyst with a report on the stock so far. This is despite the fact that the stock is up over 40x in the past year and 137% so far in 2021.
Moreover, the stock has a $3.6 billion market capitalization, and the company had over $30 million in cash at the end of September. So far, Riot Blockchain has not announced whether it is going to hold Bitcoin like some of its competitors, such as Marathon Digital Holdings (NASDAQ:MARA).
However, since Bitcoin has moved so high during Q1 the company is likely making very high margins in its Bitcoin mining operations. One reason I know this is true is that I regularly watch a number of YouTube videos of amateur miners.
To a tee, they are all claiming that their mining operations are all now at their highest level of profit ever. This is after taking into account their electricity costs. Industrial-scale miners such as Riot have low energy costs with long-term agreements with their energy providers. This leads me to believe that the company is making serious free cash flow.
I estimate that Riot will make at least 40% free cash flow margins. That means its operations will produce at least $40 million in FCF this year on a run-rate basis (i.e., 40% of roughly $160 million in revenue).
Therefore at a 1% FCF yield, RIOT stock is worth at least $4 billion. This is derived by dividing $40 million by 1%, or $4 billion). That implies at least an 11% potential gain in the stock price, or $55 per share (i.e., $4 billion divided by its market cap of $3.6 billion).
If the company continues to increase its capacity or if its FCF margins are higher than 40% RIOT stock is worth more than $55 per share and could rise more.
On the date of publication, Mark R. Hake holds a long position in Marathon Digital Holdings (MARA).