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Two years ago, a failed medical device maker called Bioptix abandoned its original business, ordered thousands of Bitcoin (BTC 1.75%) mining rigs, and rebranded itself as Riot Blockchain (RIOT -6.89%). At the time, it seemed like Riot was just another company trying to jump on the crowded Bitcoin and blockchain bandwagon to attract new investors.
Nevertheless, Bitcoin’s soaring price and the meme stock rally subsequently propelled Riot’s stock price from the single digits to nearly $78 last February. At that peak, Riot was valued at $6.1 billion — or 29 times the $213 million in revenue it would go on to generate in 2021. But today, Riot trades at about $5 per share with a market cap of about $660 million — less than two times the revenue it’s expected to generate in 2022.
Image source: Getty Images.
Riot’s stock crashed as rising interest rates drove investors away from riskier investments like growth stocks and cryptocurrencies. That exodus caused Bitcoin’s price to plunge from a peak of roughly $65,000 in November to about $20,000 today. That was bad news for Riot, whose entire business and frothy valuations were tightly tethered to Bitcoin’s volatile price.
But if Bitcoin’s price finally bottoms out, could Riot Blockchain’s stock blast off again?
Riot’s strategy is straightforward: Raise cash, buy more Bitcoin mining rigs from Bitmain, mine more Bitcoin, and recognize that Bitcoin as revenue. At the end of May, it had deployed a fleet of approximately 43,458 mining rigs with a hash rate capacity of 4.6 exahashes per second (EH/s). The EH/s metric is used to measure the overall efficiency of a Bitcoin miner’s operations.
Riot expects to complete its full deployment of approximately 120,150 miners by January, which will give it a hash rate capacity of 12.8 EH/s — so it could potentially nearly triple its scale next year. Riot acquired a large Bitcoin mining facility called Whinstone last year to accelerate its expansion.
However, Riot’s main rival, Marathon Digital (MARA -7.93%), has an even more ambitious goal. Marathon’s active fleet of 36,830 active mining rigs had a hash rate capacity of 3.9 EH/s at the end of May, making it slightly smaller than Riot, but it says it expects to deploy 199,000 miners to achieve a total hash rate capacity of 23.3 EH/s by early 2023.
In 2021, Riot’s revenue soared nearly 18 times and its net loss narrowed. Its revenue continued to rise in the first quarter of 2022, and it actually turned profitable after it divested its stake in the Canadian cryptocurrency exchange Coinsquare through a share-swap deal with fintech company Mogo (MOGO -5.55%).
Metric
2020
2021
Q1 2022
Revenue
$12.1 million
$213.2 million
$79.8 million
Net Income
($12.7 million)
($7.9 million)
$35.6 million
Data source: Riot Blockchain.
Riot held 6,536 Bitcoins, all of which it had mined itself, at the end of May. Those holdings are worth $132.6 million as of this writing, and it held another $113.6 million in cash on its balance sheet as of the end of April. Riot generated net proceeds of $7.5 million by selling 250 Bitcoins in May.
Marathon, which initially bought a large percentage of its Bitcoins instead of mining them, held 9,941 Bitcoins — currently worth $201.6 million — as well as $59.6 million in cash at the end of May. However, Marathon’s net losses widened in 2021 and it remained unprofitable in the first quarter of 2022.
Riot ended the first quarter with a surprisingly low debt-to-equity ratio of 0.1. Marathon, which completed a convertible debt offering last year, has a much higher debt-to-equity ratio of 1.0. That lower leverage should give Riot a lot more breathing room than Marathon until Bitcoin’s price recovers — assuming that it does.
Analysts expect Riot’s revenue to rise 82% this year, then grow another 64% in 2023. They also expect it to remain profitable this year before growing its earnings per share (EPS) by about 70% in 2023.
Based on those expectations, Riot’s stock looks dirt cheap at 7 times forward earnings. However, investors should take those estimates with a grain of salt because they’re pegged to Bitcoin’s unpredictable price. Many analysts likely modeled their projections for the company based on Bitcoin’s higher prices last year, and they might not have reduced them yet to account for the recent macro headwinds and the sharp slide of the cryptocurrency market.
However, Riot’s current market cap of about $660 million isn’t much higher than the total assets of $440 million it held at the end of the first quarter. Therefore, its downside potential should be fairly limited even if Bitcoin’s price takes a further steep drop. 
If you believe the price of Bitcoin will bounce back, I believe it’s safer to simply buy the crypto instead of investing in a miner like Riot. However, Riot’s stock could also outperform Bitcoin’s price if that happens — because it will be mining more Bitcoins on its own. In other words, Riot is risky — but it’s still worth buying at these bargain-bin levels if you believe in Bitcoin’s future.

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