MGT Capital Investments (OTCQB:MGTI) is a bitcoin miner, which is currently not mining because of the low price environment. The management has been fooling shareholders since long by changing businesses as it saw appealing. This behavior has cost investors more than $400 million in accumulated deficit. Revenues are decreasing, and there is no sign that they will grow in the near future. The stock, which trades at $0.08, is overvalued, and investors should avoid it.
MGT Capital Investments, Inc. is a bitcoin and blockchain technologies company with offices in Durham, North Carolina. Although it was incorporated in Delaware in 2000, it has existed since 1977 under another name and concept.
MGTI has pursued business in industries such as internet technologies, medical imaging, cybersecurity, gaming, and blockchain. Before 2019, it had nine subsidiaries that were related to the already mentioned industries to some extent, which are all dissolved as of May 2019:
MGT Cybersecurity, Inc.
MGT Sports, Inc.
MGT Studios, Inc.
MGT Interactive, LLC
MGT Gaming, Inc.
MGT Mining One, Inc.
MGT Mining Two, Inc.
MGT Sweden AB
MGTI sold its cybersecurity and gaming-related assets in 2018 due to the inability to advance them. It also ceased medical imaging and internet-related operations. Therefore, the only business segment remaining is crypto mining and other blockchain technologies (in the future). The company owns 5,750 miners (Bitmain S9 Antminer) located in Colorado and Ohio, but it is not operating them because of the low-price environment for Bitcoin. The management says that it will not operate them until bitcoin prices increase, but it fails to mention a certain price level. This probably means that there will be no revenues for most of 2019, which is not good news for investors.
According to its last 10-K Filing, MGTI's strategy is "continue to execute expansion model to secure low cost power and grow its cryptocurrency assets", and its long-term objective is "vertical integration of our cryptocurrency mining business as well as diversification into other areas of the rapidly emerging Blockchain and cryptocurrency industry."
This seems reasonable, start mining and establish itself in the blockchain, then start an exchange, and that is when the real profit comes in. But, the question is, how long will it last? MGTI seems to go always with the wave. The management appears to do a minimal due diligence on a new industry, generates some revenues, business gets sour, and then changes the concept, with the prejudice it means for investors. What does the company do with the accumulated deficit generated pursuing certain business opportunity? The company forgets it and goes on until it finds a new one that is generating profits for others.
This New Venture Is Not Going Anywhere
A look at stock-based compensation for FY 2018 is a starting clue:
Source: 2018 10-K Filing
As of May 8, 2019, the company's shares (278 million diluted) are trading at $0.08, representing a market cap of $22.24 million. The total stock awards for 2018 amount to $6.4 million. This figure represents 28.8% of MGTI market cap. This fact is alarming in two ways. The percentage of stock awards to market cap is too high, and the business performance does not support these awards. A stock-based compensation at those levels makes no sense even in high-performing companies. Imagine you own shares of Microsoft (MSFT), which is reaching a trillion-dollar market cap. 28.8% of one trillion dollars is $288 billion a year, which would be inadmissible by shareholders, even with the results achieved by current management of MSFT. On the other hand, management is supposed to be granted stocks when its price is soaring, or the financial results of the company are outstanding or above the industry average, but this is not the case.
The company has five board members, while it has only four employees. Why would a company with four employees need a separate CEO, CFO, and COO? MGTI operations are not that complicated to hire a COO, and its financial transactions are not so many to hire a CFO. The only reason I see to keep employing them is the legal burden it has.
The company is likely to continue generating losses even with new management teams. Warren Buffet wrote in one of his annual letters to shareholders that:
When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact." Source: Analystforum.com
MGTI perfectly fits the above phenomenon. Top executive positions have been changing with no major change in economic results from any particular management team. For instance, the bitcoin business doesn't seem to be going well. The company still needs external financing to fund daily operations. Revenues are decreasing to the possible extent to be none this year. The R&D expenses are way too low for a company in such a highly-changing space. Considering these factors, this new venture is not going anywhere, and if this project cannot achieve profits or at least high revenue growth, then investors will dump this stock.
MGTI is valued as if it were about to go bankrupt. In my opinion, bankruptcy is the most probable scenario. I will value MGTI on this basis and then will compare with competitors.
These are the assets and liabilities of MGTI for the end of the 2018 and 2017 periods:
Source: 2018 10-K Filing
Source: 2018 10-K Filing
At first sight, shareholders would not get a penny from the dissolution of MGTI. The only asset item that can be sold and could significantly change in value is Property and equipment, which is comprised of the mining equipment (5750 S9 Antminers). The price of a new S9 Antminer ranges between $400 and $500, so a used one should be sold for almost $300.
Doing the math here, the total market value of the miners should be a maximum of $1.73 million. This figure does not account for the setting up (arranged power supply and mining pool) of the miners, so you only need to turn them on and start mining. Thus, the value of the set up equipment would be as high as $2.6 million (1.5x miners). If the company were able to sell the mining facility for $2.6 million, adding cash and equivalents of $96,000 and digital assets of $30,000, it would get $2.73 million to distribute. Subtracting liabilities of $2.4 million, shareholders would be left with $330,000 or $0.0016 per share without accounting for full stock dilution (195 million vs. 278 million).
Those who doubt that MGTI will go bankrupt anytime soon and the current valuation takes it into account, keep reading. Enterprise value equals market value since there is no financial debt and cash is not significant. Revenues for 2018 amounted to $2 million or a negative growth of 35% from 2017. Assuming that MGTI will stop decreasing revenues this year, which is highly difficult given the low price environment for the bitcoin, forward EV/revenue would be equal to 11.12x. Comparing with competitors, this stock is clearly overvalued. The image below explains itself:
As I already mentioned, the probability of a turnaround in MGTI is nearly zero. The management is doing a thoughtless job. It is highly prone to errors, and the legal burden will not make it easier for it. So, this company will continue to struggle. With +$400 million in accumulated losses and a price with no reason other than the current price of bitcoin, I think it is time for investors to swallow their losses and dump this stock. As overvalued as it is and with a real chance of bankruptcy, it will not make them any richer.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.