Riot Blockchain (NASDAQ:RIOT) just released a very positive April production and operations update on May 10. The update shows that the company mined 206 Bitcoin (CCC:BTC-USD) during the month and has accumulated a total of 1,771 BTC on its balance sheet. As a result, RIOT stock — currently down below $30 — now looks very cheap.
At today’s price of about $56,000 per BTC (we’ll use this estimate because the price has been fluctuating), the 206 BTC mined this month equates to $11.57 million. Plus, Riot’s production will likely increase by an estimated 50% over the next 20 months to the end of 2022. This is from its purchases of more ASIC (application-specific integrated circuit) miners.
So, what should you do with RIOT stock?
RIOT Stock: Run-Rate Revenue and True Valuation
To fully understand RIOT stock, we should start by looking at the name’s run-rate revenue and measuring its true valuation.
Based on these April results and projections, the run-rate revenue for Riot is about $215 million. This is found by multiplying the roughly $12 million worth of BTC this month by 12 months and increasing that figure by 50% (i.e., $12 million x 12 months = $144 million x 1.50 = $215 million).
Given that RIOT stock currently has a market valuation of $2.4 billion, the run-rate price-to-sales (P/S) multiple is only 11.16 times. However, that is not its true P/S multiple. We need to deduct the accumulated Bitcoin that the company is starting to hold on its balance sheet.
For example, Riot announced that it had 1,771 BTC, now worth $99.18 million at $56,000 per BTC. We should deduct this from its market capitalization when calculating the P/S ratio. In fact, we can deduct another $215 million in Bitcoin production next year.
Also, we can deduct another half-year production in 2021, or $107 million. However, given the continuous growth factor, we should only take about 80% of this amount. So ($215 million + $107 million) times .80 equals $258 million in BTC. Along with its existing $99 million BTC, the total deduction is $357 million.
That makes the true P/S valuation this: ($2.4 billion – $357 million) divided by $215 million. That works out to $2.043 billion divided by $215 million, or 9.5 times sales.
But wait, there’s more. Let’s assume that the price of Bitcoin rises another 50%. That will increase the $357 million deduction by 50% and also increase the denominator by 50%. This will significantly compress the P/S multiple further, on an adjusted basis.
The adjusted P/S multiple will be ($2.4 billion – $535.5 million) divided by $322.5 million. This works out to 5.78 times sales.
Therefore, assuming just a 50% rise over the next 20 months, RIOT stock trades for just below 6 times sales. This is probably way too cheap.
What to Do with RIOT Stock
Even though RIOT stock has fallen over 47% since March-end, along with other Bitcoin mining stocks, it is still up over 65% year-to-date (YTD).
I suspect that after the “Sell in May and go away” trading phase peters out by mid-summer, Riot will return to its former heights. This will especially be the case as Riot continues to update investors each month and shows them how much BTC it is holding.
A more appropriate valuation would be 10 times adjusted sales. So, 10 times $322.5 million puts its valuation at $3.225 billion, compared to $2.4 billion today. This represents a gain of over 34% higher.
But don’t forget we would also need to add in its BTC to the market cap. That adds in $99 million on its books now. However, assuming this increases by 50% by the end of the year, it works out to about $148 million. Then we also can add in the monthly accumulation of BTC to the end of 2021, or $144 million ((roughly $12 million x 8) x 1.5). So, the total addition to its market cap target is $292 million ($148 million + $144 million).
Based on this, RIOT stock’s market cap becomes $3.517 billion (i.e., $3.225 billion + $292 million). That is 46% over its present price, making RIOT stock worth roughly $41.80 per share.
Plus, Riot could even overshoot this fair value estimate. It might become more profitable than previously estimated. Of course, there are downside risks here. But given that its mining operation runs smoothly, RIOT stock should recover fairly quickly.
On the date of publication, Mark R. Hake held a long position in Bitcoin (BTC). Mark R. Hake did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.