Riot Blockchain (NASDAQ:RIOT) announced on April 12 its first quarter mining production numbers. In addition, the company provided its ultimate Bitcoin (CCC:BTC-USD) production estimates based on its expected mining hash rate over the next year and a half or so to the end of 2022. As a result, it looks like RIOT stock could still be significantly undervalued.
In fact, based on the guidance the company provided it looks like by the end of 2022 Riot could be producing significantly more Bitcoins. Depending on the level of constantly rising difficulty to produce one BTC, this determines the number of Bitcoin that can be mined.
For example, in the April 12 release, Riot Blockchain indicated that its present hash rate was 4.0 exahash per second (EH/s) by the end of October 2021. However, now the company says by the end of 2021 its rate will be 5 EH/s and by the end of 2022, it will be 7.7 EH/s.
In other words, it’s possible, depending on mining difficulty, to see the number of Bitcoins mined rise by 92.5% (i.e., 7.7 EH/ 4.0 EH) over the Q3 rate. The Q3 rate is also likely to be at least 10% higher than the Q1 rate. Therefore, expect revenue to be at least double by next year.
In turn, that will push RIOT stock significantly higher over the next year.
Production and Valuation Estimates
The company blew through previous estimates and produced 491 Bitcoin, including 187 Bitcoin in March alone. Using the current Bitcoin price of about $61,600 implies revenue of $30.3 million. In reality, it will be lower given that the price of Bitcoin averaged a lower price in Q1.
Moreover, the March production of 187 Bitcoin implies a quarterly run rate of 561 Bitcoin during Q2. But again in reality with the introduction of more ASIC miners (application-specific integrated circuits), the Q2 rate is likely to be higher.
The bottom line is that analysts now expect Riot Blockchain will now produce $205.3 million in revenue during 2021. Riot has 84.1 million shares outstanding, so at $44.40 now, the current market capitalization is $3.734 billion. This puts RIOT stock on a price-sales (P/S) ratio of 18.2 times for 2021.
I believe 2022 revenue could be about twice the 2021 rate, depending on the Bitcoin mining difficulty rate, which can’t be predicted. This lowers the P/S multiple to just 11.5 times for 2022. That is very cheap for such a fast-growing company.
Where This Leaves RIOT Stock
A conservative estimate would be 15 times next year’s revenue, or 15 times $205 times 2 — or $6.15 billion. That is 31.76% higher than the current price price, or $58.50 (i.e., 1.3175 times $44.40 per share).
Moreover, the company said that it now has accumulated over 1,565 BTC on its balance sheet. All of these Bitcoins were mined by the company. In other words, the company is profitable enough now where it does not have to sell all the BTC it mines. It can hold a portion of these mine production as long-term investments. Right now at $61,600 per BTC, this pile is worth $96.4 million.
We can use that to estimate how fast this pile will grow. Let’s assume it keeps 50% of the BTC it mines over the next year. Assuming an average of 200 BTC in 2021, this would imply 1,200 more BTC would be added to its investment holdings. That would be worth $75.6 million, bringing the total to $172 million. That represents 4.6% of current its market cap.
We can use this as a buffer, or margin-of-safety, so to speak, in our $73.13 per share valuation for RIOT stock. But including it brings its per-share value to over $75.00.
So far there is only one Wall Street analyst covering Riot. His target price is at $64 per share or 44% above the current price. Typically, Wall Street analysts generally have a one-year outlook in their price targets.
My estimate at $73.13, which is much higher higher than the current price reflects a two-year price target, including all the latest information the company recently provided.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.