Is Riot Blockchain Stock a buy now?

Two years ago, a failed medical device manufacturer called Bioptix abandoned its original business, ordering thousands of Bitcoin (BTC -0.08%) mining rigs, and renamed itself as Riot Blockchain (RIOT 1.19%). 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 meme stock rally drove Rio’s share price from single digits to almost $ 78 in February last year. On top of that, Riot was valued at $ 6.1 billion – or 29 times the $ 213 million in revenue it would continue to generate in 2021. But today, Riot is trading at around $ 5 per share with a market value of around $ 660 million – less than twice the revenue it is expected to generate in 2022.

Image Source: Getty Images.

Rio’s shares crashed as rising interest rates drove investors away from more risky investments such as growth stocks and cryptocurrencies. This exodus caused Bitcoin’s price to plummet from a peak of around $ 65,000 in November to around $ 20,000 today. This was bad news for Riot, whose entire business and frothy valuations were closely linked to Bitcoin’s volatile price.

But if Bitcoin’s price finally bottoms out, can Riot Blockchain’s stock explode again?

Buy more miners, mine more Bitcoin

Rio’s strategy is simple: raise money, buy more Bitcoin mining rigs from Bitmain, extract more Bitcoin and recognize Bitcoin as income. By the end of May, it had deployed a fleet of approximately 43,458 mining rigs with a hash speed capacity of 4.6 exahash per second (EH / s). The EH / s calculation is used to measure the overall efficiency of a Bitcoin miner’s operations.

Riot expects to complete its full distribution of approximately 120,150 miners by January, which will give it a hash speed capacity of 12.8 EH / s – so it could potentially almost triple the scale next year. Riot bought a large Bitcoin mining facility called Whinstone last year to accelerate the expansion.

Rio’s main rival, Digital Marathon (MARA 3.75%), has an even more ambitious goal. Marathon’s active fleet of 36,830 active mining rigs had a hash speed 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 speed capacity of 23 , 3 EH / s early in 2023.

Is Riot Blockchain’s business model sustainable?

In 2021, Rio’s revenues rose almost 18 times, and net losses were reduced. Revenue continued to rise in the first quarter of 2022, and it actually became profitable after selling its stake in the Canadian cryptocurrency exchange Coinsquare through a share exchange agreement with the fintech company Mogo (MOGO 1.76%).

Data source: Riot Blockchain.

Riot had 6536 Bitcoins, all of which he had mined himself, at the end of May. These holdings are worth $ 132.6 million at the time of writing, and it had an additional $ 113.6 million in cash on balance sheet at the end of April. Riot generated $ 7.5 million in net revenue by selling 250 Bitcoins in May.

Marathon, which originally bought a large percentage of its Bitcoins instead of extracting them, had 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 loss increased in 2021, and it remained unprofitable in the first quarter of 2022.

Riot ended the first quarter with a surprisingly low debt ratio of 0.1. Marathon, which completed a convertible debt offering last year, has a much higher debt ratio of 1.0. The lower impact should give Riot much more respite than Marathon until Bitcoin’s price recovers – provided it does.

Should you believe analysts’ estimates for Riot?

Analysts expect Rio’s earnings to rise by 82% this year, and then grow another 64% in 2023. They also expect it to remain profitable this year before increasing earnings per share (EPS) by about 70% in 2023.

Based on these expectations, the Riot share looks very cheap with 7 times future earnings. However, investors should take these estimates with a pinch of salt because they are tied to Bitcoin’s unpredictable price. Many analysts probably modeled their estimates for the company based on Bitcoin’s higher prices last year, and they may not have reduced them yet to take into account the recent macro headwinds and the sharp fall in the cryptocurrency market.

However, Rio’s current market value of around $ 660 million is not much higher than the total assets of $ 440 million it had at the end of the first quarter. Therefore, the downside potential should be quite limited even if Bitcoin’s price falls further.

It’s worth buying Riot if you believe in Bitcoin

If you think the price of Bitcoin will go down, I think it’s safer to simply buy crypto instead of investing in a miner like Riot. However, Rio’s stock may also exceed the price of Bitcoins if that happens – because it will extract more Bitcoins on its own. In other words, Riot is risky – but it’s still worth buying at these bargaining levels if you believe in the future of Bitcoin.