My June 4, 2019, article about bitcoin miner MGT Capital Investments (OTCQB:MGTI) had performed well, reaching 170% profit at one point. The stock closed that day at $0.04/share. After hitting a high of $0.11/share on June 26, the stock has fallen to $0.0295/share. Do the technicals suggest the stock will make another run? What is the stock's correlation to revenue and earnings? Will Bitcoin (BTC-USD) cause the stock to spike? Will bitcoin continue surging? How is its mining operations going? And what is its current rate of dilution and status of SEC investigation?
Do the technicals suggest the stock will make another run?
The graph of MGT Capital Investments shown below looks like it is finally bottoming. The left side of the image below is the 6-month graph, while the right side is the 2-year graph. In the 6-month graph, the stock formed a bullish falling wedge with a target of $0.080 in 5-6 months. The 2019 low was $0.028 on February 5. The W%R is -91.53 (very oversold), and the RSI is 35.35 (almost oversold). And in all the times the RSI and W%R were at similar levels, as shown by the orange lines, the stock rose within the next few days. First resistance is $0.034 and second resistance is $0.041. In the 2-year graph, the stock formed a descending triangle with a target of $0.167 in 6-7 months assuming a break above resistance of $0.075. The 200-dma of $0.0617 may also serve as significant resistance. Thus, it seems very likely that the stock will rise to about $0.080-0.167 in the short run.
What is its price correlation with revenue and earnings?
Below is a table of the quarterly revenue with its corresponding closing price on the date the quarterly report was released. When the data is graphed, it appears that the stock price rises approximately logarithmic to revenue. Based on the trendline and revenue of $70,000, the stock should be $0.22/share.
Below is a table of the quarterly earnings with its corresponding closing price on the date the quarterly report was released. When the data is graphed, it appears that the stock price falls as earnings become less negative along a polynomial trendline. While stock price rising with revenue makes sense, price falling as earnings become less negative (closer to profitability) makes no sense. But based on the trendline and earnings of -$0.02/share, the stock should be $0.07/share.
This pattern can be clearly seen in the stock's 3-year price graph to revenue and earnings. The spike in the stock price at the end of 2017 correlated with a spike in quarterly revenue despite EPS (earnings per share) at a three-year low. Further, there seems to be little correlation between the stock price and EPS, which has been increasing since early 2018. Thus, the future stock price would probably be determined by its revenue and not EPS.
The trendline analysis gives an estimated range of $0.07/share to $0.22/share for the current stock price. But using the pre-2018 3-year low of $0.59 on May 18, 2017, and its revenue of $312,000, a price to revenue comparison gives a current stock price of $0.13/share. Using the 3-year high of $7.10 on December 19, 2017, and its revenue of $1,919,000, a price to revenue comparison gives a current stock price of $0.26/share. Thus, the estimated range for the current stock price becomes $0.13/share to $0.26/share.
Will bitcoin spike cause the stock to follow?
The December 19, 2017, revenue spike of $1,919,000 happened when bitcoin hit an all-time high of $19,345 and the price averaged $9,403 in the fourth quarter of 2017. From the company's 2017 10-K, it mined approximately 856 bitcoins in 2017 and had revenue of $3,134,000. Bitcoin averaged $3,973 in 2017. Dividing $3,134,000 by $3,973 gives about 789 bitcoins mined in 2017. Thus, dividing $1,919,000 by $9,403 would give a rough estimate of the number of bitcoins mined in the fourth quarter of 2017, which is about 204 bitcoins.
But only 8 bitcoins were mined in the first quarter of 2019 creating $28,000 in revenue. That means each bitcoin contributed $3,500 in revenue. The average price of bitcoin was $3,783 in the first quarter of 2019. In the second quarter, the company only mined 0.01 bitcoins but produced 38 bitcoins worth $309,000 using investor-owned machines. That is about $8,132 per bitcoin using investor-owned machines. The average price of bitcoin was $7,291 in the second quarter. The company received $47,000 (15.21% of the total) in revenue for this service.
The company's third quarter is from July 1 to September 31, and fourth quarter is from October 1 to December 31. From July 1 to September 1, the average price of bitcoin was $10,666. The difference between the average prices of bitcoin from second quarter to the first 2/3 of the third quarter is $3,375 (46.29%). The difference between the average prices of bitcoin from first quarter to the second quarter is $3,508 (92.74%). The difference between average prices of bitcoin from one quarter to the next is about the same. But the percentage difference from first quarter to the second quarter was about twice that of second quarter to the first 2/3 of the third quarter. Given that bitcoin seems to follow Elliot Wave Theory, which I mentioned in my last bitcoin article, and that it appears that the cryptocurrency is at Wave C as shown in the graph of bitcoin from March 1, 2019 to September 1, 2019 below, there seems a good chance that bitcoin's average price in the fourth quarter (October 1 to December 31) will be about 92.74% higher than its average price in the third quarter, which yields about $20,558. Technicals also support bitcoin going higher. In the graph, the W%R is -98 (extremely oversold), and the RSI is 39 (almost oversold). When the RSI and W%R were at similar levels, as shown by the orange lines, the stock rose both times.
Source: Yahoo Finance
After December 31, 2019, bitcoin may really spike. As I stated in my last bitcoin article, I see bitcoin possibly spiking to about $53,125 somewhere around February-May 2020. I also show that a logarithmic price graph gives a bitcoin price of $55,000 by mid-2020. This may cause MGTI to spike, but that also depends on how many bitcoins it can mine.
How many bitcoins can it mine?
As of June 30, 2019, the company is operating 1,260 Bitmain S9 miners in Colorado Springs and approximately 1,000 (out of 1,800) S9 miners in Coshocton, Ohio. It has not started mining operations in LaFayette, Georgia, but will have 1,100 Antminer S17 Bitcoin miners delivered in October. In February, the company stated that about 60 Bitmain S9 miners were needed to mine about one bitcoin per month. Using this data and an estimate average bitcoin price of $10,666 gives 113 bitcoins mined and $1,205,252 in revenue for the third quarter as shown in the table below.
Calculating an estimated stock price for the end of the third quarter from the price to revenue trendline gives $1.29/share. But using the pre-2018 3-year low of $0.59 on May 18, 2017, and revenue of $312,000, a price to revenue comparison gives a stock price of $2.28/share. Using the 3-year high of $7.10 on December 19, 2017, and its revenue of $1,919,000, a price to revenue comparison gives a stock price of $4.46/share. Thus, the estimated range for the stock price at the end of the third quarter becomes $2.28/share to $4.46/share.
How will dilution and SEC investigation affect the stock?
The above calculations do not account for dilution. On February 27, 2019, shareholders approved increasing the authorized common shares from 125,000,000 to 2,500,000,000. Based on the graph below, the company seems to have increased dilution from 49,348,445 shares per quarter to 88,220,911 shares per quarter when comparing first quarter to second quarter. That was a 72.07% dilution from the 122,404,668 weighted average shares outstanding in the first quarter. At that rate, it will take about 6.74 (June 2026) years to reach all authorized shares.
But apparently, the company has increased its dilution rate. As of the second quarter ending June 30, 2018, it had 218.57 million outstanding shares. As of August 30, outstanding shares were 314.40 million. That is a dilution of 95.83 million over two months or 143.74 million per quarter, which is a 68.24% dilution from the 210,625,579 weighted average shares outstanding in the first quarter. At that pace, it will take the company 15.93 quarters or 3.98 years (September 2023), to issue all authorized shares. But using the trendline shown below, all authorized shares would be reached by July 2025. This trendline seems to hint that the rate of dilution will slow in the near future. And in 2023 or 2025, bitcoin would probably be about $55,000 as mentioned above or $142,000 or more, meaning revenue will probably cause the stock to be much higher despite dilution.
The table below summarizes the eight price predictions made above using different methods and revenue. $70,000 is second quarter revenue and $1,205,252 is an estimate for third quarter revenue.
- R = revenue
- P = price
- E = earnings
Dilution was 72.07% in the second quarter and is an estimated 68.24% in the third quarter. Further, the weighted average outstanding shares at the pre-2018 3-year low was 34,476,701. The weighted average outstanding shares at the 3-year high was 37,744,600. Dilution since the pre-2018 3-year low to the end of third quarter is an estimated 927.84%. Dilution since the 3-year high to the end of third quarter is an estimated 838.85%. The table below recalculates the eight price predictions considering dilution.
Note that since $7,000 is current revenue, these four prices are basically where it probably should be. And Friday's closing price of $0.030/share was close to the 3-year high of $0.031/share. Since $1,205,252 is estimated third quarter revenue, the three price estimates say the stock could reach between $0.2457/share and $0.5317/share.
But the big overhang is probably the SEC lawsuit and multiple class action lawsuits. The SEC lawsuit accused the CEO and others of fraud and was filed on September 7, 2018. That day, shares opened at $0.60 and closed at $0.44. Class action lawsuits quickly followed. That said, until the SEC lawsuit is settled, it seems unlikely shares will rise above $0.60. In the worst-case scenario, the company is dissolved at a liquidation value of $11.8 million, but after all the lawsuits, shareholders may get nothing. On May 29, 2019, the SEC filed a third-party subpoena seeking documents pertaining to the lawsuit. The company is cooperating with the subpoena.
The overhang of SEC and class action lawsuits make MGT Capital Investments a risky investment (or gamble), but the stock could surge 10-15 fold in the next few months if revenue does reach $1.2 million and dilution does not increase more than predicted.
Disclosure: I am/we are long GBTC, MGTI. 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.