Riot Blockchain drops 5% after reporting underwhelming earnings

What happened

It’s still earnings season, with a number of high-profile companies yet to report. For those intrigued by the recent cryptocurrency rally, Riot Blockchain (RIOT -3.79%) is a company investors may have been watching closely heading into its second-quarter results, which were released after the market closed yesterday.

Today, Riot stock opened slightly lower and has lost momentum on the day, trading down 5.5% as of 11:30 a.m. ET.

The results were certainly not what investors and analysts expected. Riot missed top-line estimates, with revenue of $72.9 million. This number missed estimates by more than 5%. Even worse, a massive loss of $0.50 per share far exceeded expectations for a loss of $0.15 per share. This figure, which is higher than expected, appears to be primarily attributable to a large non-cash Bitcoin write-down fee.

On a positive note, Riot reported mining revenue of $46.2 million, up 46.6% year-over-year. However, lower Bitcoin values ​​during the quarter affected the company’s growth rate, as Riot’s Bitcoin production more than doubled from 675 BTC a year ago to 1,395 during the second quarter of this year.

By the first quarter of next year, Riot expects self-mining capacity to increase further, from a rate of 4.4 exahashes per second (EH/s) to a rate of 12.5 EH/s once the full number of antminers the company has ordered is deployed.

So what

These results are pretty interesting to dive into, in part because expectations seemed so low going into them. Most investors and analysts know that Bitcoin values ​​have fallen significantly on a year-over-year basis. Of course, these lower Bitcoin values ​​have been expected to bleed through to rather dismal results.

That said, the market doesn’t seem to have taken into account the extent of the write-down the company took. Additionally, it appears that analysts had priced in a higher EH/s rate from Riot than what was actually produced this quarter. Accordingly, forward-looking concerns appear to remain high, as uncertainty surrounding Bitcoin prices remains high.

That said, given the company’s expectations that it will nearly triple its mining capacity by the first quarter of next year, even at lower Bitcoin prices, profitability may be possible. Thus, Riot stock appears to truly be a hedged bet on where Bitcoin prices are headed from here.

What now

There are a lot of investors who could be turned off by Riot’s results, given the fact that the company produced a fairly significant loss despite more than doubling production. In many ways, this earnings report highlights the reality that scale doesn’t really help miners in a lower price environment. It is actually not good for the business to produce more of something that has a negative margin.

While Bitcoin seems to be trading above Riot’s breakeven at the moment and this non-cash depreciation is now out of the way, perhaps next quarter will be better. At least that was what the market signaled could be possible this morning.

That said, today’s loss of momentum in the stock seems to support the view that more downside could be possible should market fundamentals deteriorate again for Bitcoin. Crypto is a risky business and investors seem to remain cautious. Until that changes, Riot Blockchain stock is likely to remain volatile from here.