Where will Marathon Digital Stock be in 1 year?
At the end of 2020, Digital Marathon (MARA -5.61%) transformed from a patent holding company into a Bitcoin (BTC -3.92%) mining a. It abandoned its original business model, poured all its money into Bitcoin miners and Bitcoin purchases, and emerged as one of the market’s leading “pure play” Bitcoin miners.
As a result, Marathon’s share price rose above $80 in November 2021 when Bitcoin’s price topped $65,000. But today, Marathon’s stock trades at around $7 per share – even though Bitcoin only lost about 60% of its value in the same period.
Marathon’s stock fell further than Bitcoin’s price for three reasons. First, rising interest rates drove investors away from unprofitable technology companies with slowing growth, high debt and low cash reserves. Second, Marathon expanded its fleet of miners at a much slower rate than it had originally anticipated. Finally, it was rattled by a Securities and Exchange Commission (SEC) investigation into a joint venture last year and recently revealed some accounting problems.
Therefore, it was not surprising that 35% of Marathon’s shares were still shorted as of February 27th. But could this out-of-favour stock bounce back this year if Bitcoin’s price stabilizes and it resolves its short-term challenges?
How Much Bitcoin Does Marathon Own?
Marathon had 8,260 Bitcoins, which had a market value of about $191 million, and $220 million in unrestricted cash as of March 1. It mined 683 BTC in February, but it also sold 650 BTC during that month to cover some of its operating expenses. In comparison, Marathon’s main rival Riot Platforms mined 675 BTC in February and sold 600 BTC.
Marathon also got back 3,132 in unlimited BTC on March 8, bringing its total holdings to approx. 11,392 BTC, after closing the credit facilities with the failed one Silvergate Bank. Silvergate returned the BTC, which had been held as collateral, after Marathon pre-paid its outstanding debt of around $50 million.
Is Marathon still expanding?
Back in December 2021, Marathon claimed it could bring 133,000 Bitcoin miners online by mid-2022. However, as of March 1, it had only deployed approximately 90,000 miners. Riot operated a fleet of 87,264 miners at the end of February, but 17,040 of those miners remain offline due to a winter storm in Texas last December.
Marathon and Riot both measure their Bitcoin mining efficiency in terms of exahashes per second (EH/s). Marathon had a capacity of 9.5 EH/si at the end of February, which is only slightly lower than Riot’s 9.8 EH/s, but well below the original goal of reaching 13.3 EH/s by mid-2022.
Marathon claims it can increase its capacity to 23 EH/si by the middle of this year, but I’m skeptical it can reach that goal after largely missing its own targets last year. Riot only expects to reach 12.5 EH/s by the second half of 2023.
Can Marathon overcome the headwinds in the short term?
In late 2021, the SEC began investigating Marathon’s joint venture with Beowulf Energy, which supplied power to its data center in Montana at favorable rates. That investigation was closed after Marathon dissolved the joint venture last September.
But Marathon is not ready yet. It recently postponed its fourth-quarter earnings report, which had been scheduled for February 28, to resolve “certain accounting errors” and restate its quarterly reports for the first three quarters of 2022 as well as its annual report for 2021. It warned that all of its original filings “should no longer relied upon,” but it also said the restatements would not affect its previously reported “gross margin, operating income or net income.”
Therefore, we can still assume that Marathon’s net loss increased from $10 million in 2020 to $36 million in 2021, and then increased to $280 million in the first nine months of 2022 as Bitcoin’s price plunged and energy prices rose. The production update at the end of March also suggests that it has about $411 million in total liquidity (Bitcoin holdings and unlimited cash).
Marathon ended the third quarter of 2022 with $805 million in total liabilities and a debt-to-equity ratio of 1.3, but this leverage was reduced after it terminated its credit facilities with Silvergate. However, investors should not put any faith in these estimates until Marathon files updated quarterly and annual reports.
Will Marathon’s share price rise in 2023?
With an enterprise value of $1.4 billion, Marathon trades at about 3 times its estimated 2024 sales. Riot, which faces no near-term regulatory or accounting issues, trades at 2 times its 2024 sales.
If Bitcoin’s price continues to rise, both Marathon and Riot could rise through the end of 2023. However, I expect Marathon to underperform Riot – as it has for the past 12 months – until it resolves its short-term issues and achieves its goals. capacity target for mid-2023. So for now, I would personally buy Riot over Marathon as a speculative Bitcoin mining stock.