- Marathon's recent production updates give us clearer insights into what revenue could look like over the next 12 months.
- The company estimates that monthly Bitcoin production could reach as high as 2900 by mid-2022.
- The restoration of Bitcoin's overall network hashrate could provide headwinds for Marathon's mining operation.
Marathon Digital (NASDAQ:MARA) is a company in the Bitcoin mining space. It has been carving out its place as a sector leader in the space by investing heavily in its mining fleet and by extension, ensuring its hashrate growth surpasses that of the whole network while also reducing costs and increasing its relative share of its pooling agreement with other miners. The industry is highly competitive and companies must constantly invest to stay ahead of their competition, which Marathon has been doing with devices from leading World Brands such as Bitmain. Today we will take a look at Marathon's recent updates and discuss what investors can expect going forward.
Before we get started, if you'd like definitions of a few key terms concerning cryptocurrency, please see the Crypto Cheatsheet in my previous article. But of course, crypto veterans feel free to skip this section.
Like stocks, the value of Bitcoin fluctuates. But unlike stocks, there are limited fundamental explanations as to why it rises or falls. When Bitcoin was released in 2009, it cost pennies per coin and its cryptocurrency user base was tiny. Other than some initial peddlers who were intrigued by its premise but focused more on mining bitcoins outright rather than trading them for goods and services, few people used them until a series of bombastic moves made the tokens a mainstream talking point and ignited interest in the wider cryptocurrency industry.
The prevailing arguments for Bitcoin appreciation going forward have been increased adoption, a speculative hedge against inflation and the built-in scarcity dynamics of the token. China's Bitcoin crackdown has recently taken over headline surrounding cryptocurrencies. The country had previously banned cryptocurrency mining which had removed roughly half of the overall Bitcoin Network hashrate (discussed here). This triggered a miner migration from China and a boon for mining companies with limited exposure to the country. Between the migration and investments by sophisticated miners, the overall network hash rate is now almost at pre-crackdown levels which implied that the hashrate to earn a given reward by individual miners has risen.
A more detailed profile of the company can be found here. The company recently released a production update on its mining operation. The company continues to benefit from the deployment of its newly purchased miners. The strong delivery schedule should propel the stock to its long-term goal of 55 to 60 tokens per day. Investors should pay attention to the overall network hashrate though as the probability of earning a reward and the percentage of pooled earnings depends on the relative hashrate of Marathon versus the industry and pool participants respectively.
Source: Marathon Digital
The company expects to hit productions levels as high as 2900 by mid-2022 thanks to its Bitmain purchases. These numbers may be a bit aggressive in light of the aggressive hashrate improvements from Marathon's peers and the built-in scarcity dynamics of Bitcoin.
Source: Marathon Digital
We can also see the recent ramp-up of the Bitcoin production in the chart below.
Source: Marathon Digital
It is important to note that the ramp-up in production is only just beginning to take effect and that a large portion of Marathon's Bitcoin reserves are from the direct purchases it made and not mining operations. All signs point to this changing with time. The company is also fairly liquid with $70.9 million in cash and 6,695 Bitcoin which totals to roughly $400 million in total liquidity along with no long-term debt.
Analysis and Forward-Looking Commentary
Bitcoin is Marathon Digital's only real product, which simplifies the analysis. The company produced 492 BTC in September but expects to reach 2900 BTC per month by mid-2022. If we take that trajectory as a guide, we get roughly 26000 bitcoin for the year, which we can take as the best case for our estimates. The company is currently investing heavily in its fleet but it is unclear what the probability of the reward will look like when the fleet is finally fully deployed. As our guide for the worst case, we will take 16000 BTC for the next 12 months. For the best case (most unlikely), we will take 21000 BTC. I expect the actual number to come in somewhere between the base and best case, with the fleet deployments playing a major role. For BTC's prices, we will take $30k as the worst case, the current price, and $65k as the best case. Below are the rough revenue estimates for the different cases.
|Bitcoin Production||Low||Base (current)||Best|
|$ 30,000.00||$ 49,650.00||$ 65,000.00|
|22,695||$ 680,850,000.00||$ 1,126,806,750.00||$ 1,475,175,000.00|
|27,695||$ 830,850,000.00||$ 1,375,056,750.00||$ 1,800,175,000.00|
|32,695||$ 980,850,000.00||$ 1,623,306,750.00||$ 2,125,175,000.00|
Source: Author's Estimates
Now here's where Marathon Digital gets interesting. The company trades at an extremely high P/S ratio compared to some of the more sophisticated mining companies. The companies are all heavily investing in their overall hashrates like Marathon, so it is more prudent to pay attention to forward P/S figures.
We will be using a more conservative P/S ratio of 6. This is to account for the likely normalization of Bitcoin mining which would likely compress multiples and pool fees. Based on these parameters we get the following estimates for the stock based on the different BTC prices and production levels.
|Bitcoin Production||Worst||Base (current)||Best|
|BTC$||$ 30,000.00||$ 49,650.00||$ 65,000.00|
|Worst||$ 41.00||$ 67.86||$ 88.84|
|Base||$ 50.04||$ 82.81||$ 108.41|
|Best||$ 59.07||$ 97.76||$ 127.98|
Source: Author's Estimates
*These estimates ignore the effect of future dilution on P/S ratios.
Marathon Digital is in a very important phase right now. Investors may finally begin to see the results of the mining investments over the coming year. The elephant in the room is Bitcoin legislation. Investors should pay keen attention to that space as it can either add a layer of legitimacy or ruin the investment. We can only trade what we know and right now the signs are positive. The investment is becoming more and more speculative with time but Marathon is a Buy right now. Feel free to check out a few of my favorite mining plays in Bit Digital (BTBT) here and HIVE Blockchain Technologies (HIVE) here.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of MARA either through stock ownership, options, or other derivatives. 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.
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