Marathon Digital Holdings (NASDAQ:MARA) has been one of the biggest stock stories of late. Shares were well under $1 a year ago, and now trade near $35. At this point, the Bitcoin (CCC:BTC-USD) miner’s meteoric rise should cause trepidation on the part of investors.
In fact, its mining business does seem overpriced. It’s the company’s business moves outside of mining operations that have bolstered MARA stock. However, that only complicates the investment thesis behind the security.
Ultimately, there are a few reasons I think the recent downturn in price will continue.
Since Marathon Digital Holdings is a Bitcoin mining company, it makes sense to understand how the company fares as a miner. MARA stock didn’t take off until December 2020, but investors need to look back to that time to understand what’s happening with the company.
In the fourth quarter of 2020, Marathon Digital Holdings mined 157 Bitcoins. Marathon also bills itself as a “digital asset technology company.” In the same period, it reported $2.6 million in revenues and a net loss of $5.2 million. The investors that are so interested in Bitcoin mining, and Marathon Digital Holdings in particular, seem to continue to remain disinterested in metrics.
Throughout the entire year of 2020 the company recorded over $4 million in mining revenues. Those operations lead to a net loss of nearly $10.5 million. So it looks like the company is continuing more of what it did throughout 2020; that is, continue roughly incur a net loss of $2 for each $1 of Bitcoin revenue it mines.
To me, that isn’t the most appealing business to buy into.
Marathon Digital Holdings had 5,134.2 Bitcoins as of April 5, but it’s important to note that the vast majority were purchased, not mined. The company purchased 4,813 of those 5,134.2 Bitcoins with proceeds from an at-the-market offering with $150 million.
Those Bitcoins were purchased at an average price above $31k, so currently the deal is a good one for the company. Currently, Bitcoin is price around $55 million. But I can’t help but wonder if MARA stock investors are conflating the company’s Bitcoin holdings with its actual mining results.
There’s nothing to indicate that the company is getting better at making money from mining Bitcoin. Isn’t that what stock investors are buying into? The strength of the company? Nevertheless, the company is ramping up the scale of those less-than stellar-operations.
Increasing Mining Activity
The company listed an active mining fleet of 6,800 miners at the end of Q1 2021. It anticipates that the figure will swell to 103,120 by this time in 2022. That will increase its hashrate (EH/s) by a factor of 14.6, from 0.71 to 10.37.
That’s a positive in that the company will be able to mine more Bitcoin rather than purchase it in order to increase its holdings.
But it also raises a legitimate concern: Mining operations are leading to net losses that seem to scale with revenue generated from mining operations.
I think that there are plenty of better plays at Bitcoin. As more and more investors get wise to mining companies with time, they’ll decline in popularity.
Options for Bitcoin Exposure Continue to Increase
I think the reason that investors are piling into companies like Marathon Digital Holdings is that Bitcoin is simply so attractive that any entry point will be flooded with activity. Investors can still buy Bitcoin for exposure. It also looks like Bitcoin ETFs will soon gain approval. This will fundamentally change the way that markets interact with Bitcoin. Right now, Bitcoin mining stocks are popular because they are a method to gain stock market exposure to Bitcoin.
Bitcoin ETFs will give investors better options. That is one reason among many that indicate MARA stock should be avoided.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.”