Riot Blockchain Is Ready To Fly
Summary
- RIOT has been pummeled in recent weeks.
- Bitcoin weakness isn't helping, but Riot is cheap even relative to prior selling episodes.
- With capacity expanding nicely and a new acquisition, I think Riot's risk/reward is very good at the moment.
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The world of cryptocurrencies has been wild in the past couple of months, to say the least. OG Bitcoin (BTC-USD) has been very weak, most of which occurred about five seconds after this bullish analysis was posted a few weeks ago. That was poorly timed to be sure, but if you’re going to make predictions, you’re going to be wrong sometimes.
At any rate, my longer-term bullish outlook on Bitcoin hasn’t changed, and therefore, I still think there’s room for miners in more aggressive traders’ portfolios. That includes Riot Blockchain (RIOT), a Bitcoin miner that is in the midst of a rapid expansion of capacity, and one that I think has an extremely favorable risk/reward profile at the moment.
Source: StockCharts
There are a lot of things going on in this chart, so I’ll try to distill it down to the salient points. First, price support looms just below the current level at $21/$22, which is from relative lows set in 2021. We’re very close to those levels today, so Riot is either ready to bounce, or it’s going to break down with no support in sight. I believe it will be the former.
However, the A/D line is still very weak, so the stock is being sold on bounces, rather than bought on dips. That’s exactly the opposite behavior from what I want to see from a stock that I want to own, but it is what it is.
Momentum is a bit rosier as the PPO is bottoming right near where it did last time, and the short-term line is in the process of crossing over the long-term line. With this coinciding with key price support, I believe the odds of a bounce are much higher than a breakdown.
However, much of this depends upon what Bitcoin itself is doing. Below, we have the absolute price of Bitcoin and Riot’s correlation to that price on a 10-day rolling basis.
Source: StockCharts
Bitcoin has been in a downtrend since early November, and Riot remains extremely correlated to it. Thus, it is certainly no surprise Riot is suffering. However, if we look at the price of Riot relative to that of Bitcoin, the picture is a bit brighter.
Source: StockCharts.
We can see that Riot is now very close to as cheap as it has been relative to the value of Bitcoin at any time in the past year. There have been three other instances of lower lows than today, but we’re very close to the bottom. With Riot being so correlated to Bitcoin, this would suggest you’re getting strong value today if you buy Riot.
Now, let’s take a look at some fundamental developments to see if that has improved.
Expansion is well underway
I explained the bull case in detail in my prior article on Riot and the long-term case hasn’t changed. I won’t go through the whole thing again for that reason, but I do want to update the progress that’s being made.
Let’s begin with a snapshot of what Riot looks like today.
Source: Investor presentation
The company has 4.5k Bitcoin on its balance sheet, or roughly $210 million worth. It also mined 1.3k Bitcoin in the most recent three-month reporting period, with a 75.7% margin, or a cost of $10k per mined coin. Finally, its hashing capacity is 3.0 exahashes per second, but its future capacity is slated to be triple that number. That effectively means Riot should be producing triple the mining power it has today, with a similar increase in its ability to mine coins, all else equal. Riot has already experienced huge increases in mining capabilities in the past few quarters, but I like the stock because there’s a lot more to come.
I covered the Whinstone acquisition in my linked article, and it’s a big deal. Riot is taking over a facility with 750 MW of capacity and an industry-leading power rate, which essentially means Riot is buying a ton of low-cost capacity. Thus, we’ll see Riot gain not only the outright capability to mine more coins but also the ability to do so with very high margins.
Source: Investor presentation
By the end of this year, Riot expects to have 750 MW of capacity available, with the ability to house 112k miners. This expansion is already underway, so it’s not a case of investing in hopes and dreams; this is real.
Source: Investor presentation
We can see Riot’s hash rate expansion, which has been huge already just since the start of 2021. It was about 1 EH/S a year ago and is ~3 today. As I mentioned, it’s expected to be ~9 in twelve months’ time.
That should set the stage for what could be some pretty epic revenue growth, and as it turns out, I’m not the only one that feels that way. Below we have the company’s revenue revision schedule, and it looks pretty bullish to me.
Source: Seeking Alpha
Revenue estimates continue to move higher, and there are huge gaps between the years, indicating strong year-over-year growth. This chart is pretty self-explanatory so I won’t waste your time, but it’s important to see the kind of growth we’re looking at here. Revenue should triple between now and the end of 2023; there aren’t many stocks in any sector that can boast that.
Now, building out Whinstone (or any other facility) requires a huge amount of investment in the components that allow the miner to operate profitably. Some of the components required for the Whinstone buildout are listed below.
Source: Investor presentation
Most of the infrastructure is electrical given the massive power demands Bitcoin mining requires; that’s no surprise. But I want also to point out that Riot already has almost all of the major components it needs either installed or delivered and waiting to be installed. That means the company is moving ever closer to the 9 EH/S capacity we talked about earlier, and with it, more and more Bitcoin being mined.
One new development since my last coverage of Riot is the acquisition of ESS Metron, a provider of exactly the kinds of electrical equipment that Riot needs to build out its facilities.
Source: Investor presentation
This acquisition essentially puts the company in control of the supply chain of its critical infrastructure components, a move that I think is quite prudent. We’ll see if it works out, and keep in mind Riot diluted shareholders by issuing 715k shares for the acquisition. However, Riot will gain the engineering expertise of ESS Metron, as well as the tangible benefit of owning that part of the supply chain, so on paper, it looks great for those of us that are bullish. It should mean easier access to components, and at lower costs than if the company was buying them from a vendor.
Let’s value RIOT
Valuing a Bitcoin miner is never an easy task, and I took one look at it earlier with Riot’s price relative to that of the coin itself. Obviously, another way to do that is using EPS, which you can see below.
Source: Seeking Alpha
Analysts expect $1.68 in EPS for 2022, which means Riot is priced at just 13X forward earnings. For a company that is going to see the revenue growth we looked at earlier, as well as 150% EPS growth this year, that seems like a bargain to me.
There are obvious risks to owning Riot (or any other Bitcoin miner), so please ensure your positions are sized accordingly. The first risk is that the price of Bitcoin collapses, which would mean Riot could easily fall into the single-digits. I don’t think we’ll see that from Bitcoin, but that’s a risk you must acknowledge.
Second, Riot’s expansion may not go to plan. Again, there’s been enough progress that I think the risk of this is relatively low, but it’s something else that could go wrong.
Third, Riot is about as close to a pure risk asset as I can think of, so if there’s a market-wide selloff, Riot will almost certainly take a pounding, as it has in other selling episodes in the past.
Even considering all of these risks, as well as the bullish points above, I cannot help but think there’s a lot to like here. If you end up buying this stock, keep your stop loss around $20 to avoid a waterfall decline if things go south. Otherwise, Riot’s risk/reward proposition looks outstanding at the moment.
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This article was written by
Josh Arnold has been covering financial markets for a decade, utilizing a combination of technical and fundamental analysis to identify potential winners early on in their growth cycles. Josh's focus is mainly on growth stocks. His goal is efficient and profitable use of capital, which overly rigid buy-and-hold strategies do not allow.
Josh is the leader of the investing group Timely Trader where he focuses on limiting risk and maximizing potential reward. Features of Timely Trader include: real-time alerts, a model portfolio, technical charts, sentiment indicators, and sector analysis to find the best trading opportunities. Learn more.Analyst’s Disclosure: I/we have a beneficial long position in the shares of RIOT 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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