The past month or so in financial markets has seen a tussle between those that think a recession is looming and therefore, risk exposure should be removed, and those that think the worst is behind us, and that adding risk exposure is the right move. I’m firmly in the latter camp, as I’ve made clear with various articles, including my call three weeks ago that stocks have bottomed. Unless and until we get a new low, I’m sticking with that call.
I made a similar call on Bitcoin (BTC-USD) a month ago, stating the coin was bottoming in mid-June. Given that, I’m bullish on the coin itself, but you’ll also note in my recent work that I’m very bullish on the miners. Bitcoin miners provide leveraged exposure to Bitcoin price, so if you’re bullish on Bitcoin, you’re almost certainly even more bullish on the miners. That works the other way, of course, and miners have been slaughtered this year. That, however, has created massive opportunities, and one of those we see playing out right now is with Marathon Digital (NASDAQ:MARA).
In this article, we’ll take a look at the technical picture, as well as some fundamental developments that likely support higher prices ahead.
I’ve mentioned short squeezes in prior articles, particularly with Bitcoin miners, because short interest in the group has grown to enormous levels this year. Shorting Bitcoin miners has been a tremendously profitable trade, but if you believe Bitcoin has bottomed, as I do, that short interest needs to be unwound. Marathon’s short interest is 30%, which is awfully high by any measure. Now, a short squeeze isn’t going to happen just because a stock has high short interest. You also need rapidly rising price action on big volume, and preferably, a breakout past key price resistance. Let’s take a look and see what’s what with Marathon.
First, I want to note that between May and June, there was a huge positive divergence put in place on the PPO. Price fell from $8 to $5 while the PPO actually moved higher, which was a clue that Marathon was bottoming. Well, bottom it did and the stock closed yesterday at almost $13.
Marathon has cleared its 20-day EMA, which is now moving higher, and its 50-day SMA, which should turn higher in the coming weeks. Those should serve as support on pullbacks in the months to come, and the MAs turning higher is a great sign. There’s a big zone of congestion around $20 that is likely to provide fierce resistance, so that’s really the next level to watch on the upside for a reversal. But $20 is a long way from $13, so there’s plenty of room in this one.
Next, look at the volume bars for the past few days when Marathon has soared; 55 million shares traded hands yesterday as the stock added 32%. That’s about four times normal volume, and is indicative of the high-volume breakout I mentioned above.
We also see the accumulation/distribution line flying higher as buyers scramble to cover their shorts. The PPO and 14-day RSI are showing overbought conditions, which is what happens during a short squeeze. Buyers overwhelm sellers as shorts buy-to-cover, and I believe that’s exactly what we’re seeing now.
The 10-day rate of change is 112%, indicating the stock has more than doubled in the space of two weeks. Again, highly indicative of a short squeeze.
The bottom line on the chart is that Marathon’s bias is firmly to the upside so long as short squeeze conditions are in place. I will caution that when squeezes end, the selloffs can be absolutely brutal. Don’t overstay your welcome; if you catch these massive moves, take your profits and live to fight another day.
One final point I’ll make is the very last panel shows Marathon’s price relative to Bitcoin. I like this measure for commodity producers of all kinds, and Bitcoin is no different. We can see Marathon’s value against Bitcoin has soared in recent weeks, but that’s to be expected. I mentioned miners are just leveraged plays on the coin, so you see Bitcoin outperform miners on the way down, and the opposite on the way up. The relative value chart shows Marathon potentially has a very long way to go in terms of relative value to Bitcoin.
Hopefully it’s obvious that I’m quite bullish on the chart, but I also think the fundamental story has some legs. Let’s take a look.
Marathon, like other miners, is very focused on adding capacity at low cost. After all, that’s what any commodity miner does. However, Marathon is at an inflection point with its capacity, and therefore, its ability to generate Bitcoin (and revenue).
Early this year, Marathon had about 37k machines deployed. It reckons that number in spring of 2023 will be ~200k, and that its hash rate will grow from 3.9 EH/s to ~23 EH/s. If you’re keeping score at home, that’s about 6X what it was in March of this year. Now, Marathon has to execute, and that’s one risk of the fundamental case. However, it’s well on its way securing capacity to do just that, in addition to getting the machines shipped and installed.
To be sure, there are operational challenges for miners. Marathon itself has struggled in recent months with Bitcoin production through lost capacity. Those kinds of things are going to happen with any commodity mining operation, but the key is to focus on the long-term. Is Marathon driving towards its goal of increased capacity? If the answer is yes, these blips on a monthly basis are probably okay. If they become the norm, you must reassess. For now, I don’t see anything alarming, but this plan to have 6X the capacity in the space of a year is ambitious, and does carry with it some inherent risk you must take on as a shareholder.
Marathon reckons its costs to mine one Bitcoin come to about $6.2k as of the first quarter of this year. The coin is trading about 4X that level, so margins are good right now for Marathon. However, we should be seeing a virtuous combination of lower costs as capacity rises, and a rising Bitcoin price in the coming months if I’m right about Bitcoin’s bottom already being in.
If those things happen you’ll get 1) much more Bitcoin mined each month 2) much better margins on those mined coins through lower costs and 3) a rising Bitcoin price to further juice margins. Some things have to fall into place for that to come to fruition, but the if they do, the results could be absolutely epic for Marathon.
The company HODLs like most miners, because they believe in the long-term price potential of Bitcoin. We know some miners have had cash flow issues in recent months as the price of Bitcoin has declined, and have had to sell. Marathon ended June with 10,055 coins, worth about $237 million at today’s Bitcoin price. But keep in mind that if Bitcoin has bottomed and is going higher for the foreseeable future, those 10k coins will be worth more than they are today, in addition to the capacity the company is adding as it ramps production. That’s the upside potential.
I’ve mentioned the revenue growth story potential here, and this is perhaps the best way to show the magnitude of the opportunity.
Revenue was negligible just two years ago, and next year, the company could quite easily see ~$900 million if all goes to plan. That would be roughly triple this year’s expected revenue. It’s worth remembering there is potentially tremendous upside or downside to these estimates based upon Bitcoin’s price action. So if you’re not sure about Bitcoin’s price path going forward, this stock is not for you.
We see an even better story with earnings potential.
Marathon has never been profitable on an adjusted EPS basis, but that’s set to change next year. Current estimates are for $1.30 in EPS, and even with the share price having doubled in the past two weeks, it’s still only 10X that figure. In other words, Marathon had fallen so far, even the share price doubling hasn’t taken away the value proposition at this point.
One problem for some of the weaker miners is that they have taken on a lot of debt to build capacity, and Marathon has done that as well. It has more than $700 million of long-term debt on the balance sheet, but what matters is net debt and resulting interest expense. Conveniently, those two metrics are plotted below.
Net debt has risen to $394 million, and it’s lower than long-term debt because of Marathon’s ample cash position. The company has other lines of credit that are as yet undrawn, so liquidity is pretty good. We can also see interest expense is negligible, which is a key consideration with debt. Having debt is one thing; having debt you cannot afford to service is altogether different. Marathon is firmly in the former camp, so I see no financing issues for the foreseeable future.
Another thing miners like to do is use their common stock as a piggy bank, and Marathon has certainly done that in the past.
However, its share count has been pretty flat since Q4 of 2020, which is terrific considering how much the company has invested in capacity since then. Dilution is always a possibility here, but Marathon has done a nice job of not diluting shareholders into oblivion to expand capacity.
I want to make it absolutely clear that owning any Bitcoin miner is fraught with risk. They are wholly dependent upon Bitcoin prices rising, so if they don’t, we could easily see another massive swoon in the share prices of the miners. Other risks include regulatory changes, rising electricity and/or production costs, financing, and the list goes on. However, based on what I see in Marathon, those risks appear to have been reduced as much as possible for the moment.
The company is ramping capacity at just the right time, if I’m right that Bitcoin has bottomed. And if we look at the P/S ratio, it looks relatively well priced.
The stock is going for ~4X forward sales at the moment, but keep in mind that as we get closer to 2023, the “S” portion of that ratio – that is, sales estimates – will ramp considerably. The stock is currently more like 1.6X sales if you use 2023 estimates.
Given what we’ve looked at here, I think two things are in play. First, this is a miner that is ramping capacity in a huge way, and at just the right time. It’s well capitalized, has a plan, and is reasonably priced. Second, I believe a short squeeze is in progress, and when that happens, the upside potential is huge. We’ve seen the stock double in the past two weeks, so I don’t want you to think this is free money by any means. However, if you want to own it, now seems like quite the opportune time.
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This article was written by
I've been covering financial markets for ten years, using a combination of technical and fundamental analysis to identify potential winners (and losers) early, particularly when it comes to growth stocks.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in MARA over 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.