• Wed. Jun 22nd, 2022

Better Bitcoin Stock: Riot Blockchain vs. Marathon Digital Holdings

ByHazel R. Lang

Jun 4, 2022

Riot Blockchain (RIOT -9.61%) and Marathon Digital Backgrounds (MARA -5.78%) are both Bitcoin (BTC 0.66%) mining companies. The two originally operated completely different businesses before turning to Bitcoin mining.

Riot was originally a medical device maker called Bioptix, but it quit that business four years ago and ordered Bitcoin mining hardware. Marathon was initially a patent-holding company that generated most of its revenue from licensing fees, but it also rebranded itself as a Bitcoin mining company in 2020 and commissioned mining hardware.

These transformations were abrupt, but shares of Riot and Marathon soared as the price of Bitcoin hit an all-time high of over $68,000 last November. However, Bitcoin’s price then fell to around $31,000 (at the time of this writing) as rising interest rates drove investors away from riskier stocks and cryptocurrencies – and both stocks have collapsed.

Could Riot and Marathon make a comeback this year if the price of Bitcoin stabilizes? Let’s reassess their companies and valuations to find out.

Image source: Getty Images.

The similarities and the differences

Both Riot and Marathon have placed massive orders with Bitmain, the world’s largest producer of ASIC miners, to build their mining fleets. They both generate most of their income in the form of Bitcoin from these mining operations. Riot’s mining operations are currently larger than Marathon’s, but Marathon expects to overtake Riot with a larger fleet next year.

Riot had deployed 46,375 miners by the end of April and plans to deploy around 120,150 miners by January. It expects its total hash rate capacity – which measures the efficiency of its mining operations – to rise from 4.7 EH/s (exahashes per second) at the end of April to 12.8 EH/s once its full deployment completed.

At the start of May, Marathon’s fleet consisted of 36,830 active miners with a hash rate of 3.9 PE/s. It plans to deploy 199,000 miners to generate a total hash rate capacity of 23.3 PE/s by “early 2023”.

Businesses face similar challenges

Both Riot and Marathon generated explosive revenue growth last year by deploying more miners and driving the price of Bitcoin higher.

Company

2020 turnover

2021 turnover

Q1 2022 revenue

Riot Blockchain

$12.1 million

$213.2 million

$79.8 million

digital marathon

$4.4 million

$150.5 million

$51.7 million

Data source: Company earnings reports.

However, both companies face slower growth in 2022 as Bitcoin’s value declines. For 2022, analysts expect Riot’s revenue to grow 88% to $402 million and Marathon’s revenue to grow 236% to $506 million – but those estimates are fragile because they’re tied to the volatile bitcoin price.

The bitcoin price has gone down, but energy costs have gone up. Both Riot and Marathon are trying to mitigate these costs by increasing their scale: Riot acquired a major Bitcoin mining facility called Whinstone last year, and Marathon launched a joint venture with energy company Beowulf to operate its data centers at great rates in Hardin, Montana.

Marathon has remained unprofitable for the past two years, but Riot reduced its net loss in 2021 and became profitable in the first quarter of 2022.

Company

Net result 2020

Net income 2021

Q1 2022 net income

Riot Blockchain

($12.7 million)

($7.9 million)

$35.6 million

digital marathon

($10.4 million)

($36.2 million)

($13.0 million)

Data source: Company earnings reports.

Riot’s net profits were significantly boosted by its divestiture of Canadian cryptocurrency exchange Coinsquare through a stock swap deal with a fintech company Mogo.

Analysts expect Riot to remain profitable with net income of $96 million this year. They also expect Marathon to generate a net profit of $65 million. But again, these estimates rely heavily on Bitcoin price stabilization.

Which Bitcoin miner is the best investment?

Both Riot and Marathon are trading at around 10x forward earnings, and both stocks could rally if Bitcoin’s price rebounds. But if I had to choose one of these miners over another, I would choose Riot – even though it grows a little slower than Marathon and has less ambitious goals for its mining fleet – for two reasons.

First, Marathon’s aforementioned deal with Beowulf has been under investigation by the Securities and Exchange Commission since last November. If forced to abandon this joint venture, its energy costs could skyrocket. Second, Riot’s leverage ratio of 0.1 is well below Marathon’s ratio of 1, which was boosted by a large convertible debt offering last year.

Even so, Riot is still a speculative bet on Bitcoin. I think it’s smarter to just buy Bitcoin instead of investing in a capital-intensive miner, but Riot’s business could continue to grow if Bitcoin stabilizes.


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