With Bitcoin (CCC:BTC-USD) and other cryptocurrencies surging, investors have been scrambling to find stocks to play this trend. One is Riot Blockchain (NASDAQ:RIOT). Interestingly enough, until recently the company was mostly ignored, trading in a range of $1 to $2 a share. But since late October, RIOT stock has become one of the hottest plays on Wall Street. The price has gone from $3 to a high of $79.50.
Now when crypto ran into some headwinds during the past few weeks, RIOT stock plunged to $34. But this proved temporary. The shares are now fetching $63 and the market capitalization is a hefty $4.3 billion.
So then, is Riot Blockchain still a good investment? Well, let’s take a look.
Background on Riot Blockchain
Keep in mind that Riot Blockchain was started back in 2000, when the dot-com bubble burst. The company was a diagnostic equipment maker but the business had little traction. So in October 2017, the company pivoted to the crypto industry. At the time, it was a very controversial decision. But of course, it has been proven to be spot-on – at least in terms of generating substantial shareholder value.
Riot Blockchain focuses primarily on mining cryptocurrencies. This involves the use of high-powered computers and sophisticated algorithms to create Bitcoins.
The approach is known as proof-of-work (PoW) mining. For the most part, this means that Riot Blockchain competes with other operators to solve complex puzzles to get more Bitcoins.
Consider that the company has continued to push innovation. For example, it recently achieved a capacity of 1.06 Exahash per second for its 2,002 S19 Pro Antminers. The plan is to triple capacity by the fourth quarter of 2021.
Now it’s important to note that Riot Blockchain is still a relatively small company. For the first nine months of last year, the revenues came to only $6.7 million, up about 21% on a year-over-year basis. Although, there was a nice improvement in margins, from 18% to 38% during the past year. The company is clearly achieving some economies of scale and is benefiting from cost cutting.
Bottom Line On RIOT Stock
One of the advantages for RIOT stock is that there are not many publicly traded crypto currencies available. This has added fuel to the category. Although, as time goes by, it seems likely that more companies will go public.
Although, for RIOT stock, the biggest driver seems to be the seemingly insatiable interest in cryptocurrencies. The fact is that they are going mainstream, at least the top ones like Bitcoin. For example, Mastercard (NYSE:MA) is upgrading its network for cryptocurrencies, which will spur demand. Then there is the heavy investments from mobile payments operators like PayPal (NASDAQ:PYPL) and Square (NYSE:SQ).
Institutional investors – like hedge funds – have been allocating more of their portfolio to cryptocurrencies as well. In fact, some of the world’s top investors, such as Paul Tudor Jones and Stanley Druckenmiller, are big-time bulls. They generally think cryptocurrencies represent a better hedge against potential inflation.
Yet in terms of traditional valuation metrics, RIOT stock really does not make any sense. After all, the shares are trading at 260 times sales!
But in today’s markets, this is not much of a consideration for investors. RIOT stock is a classic momentum play. And given the underlying strength in cryptocurrencies, it seems like there could be further gains. Although, this is really an investment for those who can stomach considerable risk as the volatility is likely to remain extreme.
All this is certainly quite bullish for RIOT stock – and it seems that the gains will continue. Although, expect there to be periodic drops, which will probably be steep. Thus, for investors with RIOT, the momentum seems genuine, but keep the risk in mind.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.