Four years ago, a failed medical device maker called Bioptix rebranded itself as Riot Blockchain (RIOT 6.51%) and became a Bitcoin (BTC 1.32%) mining company. To jump-start that transformation, it bought the mining start-up Kairos Global Technology, invested in the cryptocurrency exchange Coinsquare, and ordered thousands of miners from Bitmain.

Earlier this year, Riot exchanged its stake in Coinsquare for new shares of the fintech company Mogo (MOGO 0.33%). It also acquired Whitstone, which owns one of the largest Bitcoin mining facilities in North America.

A digital illustration of a Bitcoin emerging from a screen.

Image source: Getty Images.

Many investors were initially skeptical of Riot's plans, but its revenue has skyrocketed alongside Bitcoin's rising prices as its stock price rallied nearly 1,000% over the past 12 months. Is Riot Blockchain's stock still worth buying at these levels, or is it getting too hot to handle?

The key numbers

Riot held 3,995 Bitcoins, which are currently worth about $238 million, at the end of October. Unlike its top rival Marathon Digital (MARA 2.42%), which purchases Bitcoins to accelerate its transformation from a patent-holding company into a Bitcoin miner, Riot mined all of those coins by itself.

Riot mined most of those coins this year. In the first 10 months of 2021, it mined 2,921 Bitcoins, representing a 257% increase from a year ago. It ended the month with a fleet of 27,270 miners with a hash rate capacity (which gauges its overall mining efficiency) of 2.8 exahash per second (EH/s).

By comparison, Marathon's fleet of 27,280 miners were producing 2.96 EH/s at the end of October. Marathon still trailed behind Riot in terms of overall production, with 2,516 Bitcoins mined in the first 10 months, but it held nearly twice as many (7,453) Bitcoins at the end of October.

By the end of 2022, Riot expects to expand its fleet to 90,150 miners with a self-mining hash rate capacity of 8.6 EH/s. However, Marathon expects to expand its fleet to 133,000 miners with an EH/s of 13.3 EH/s by mid-2022.

Both plans are very expensive since each top-tier ASIC miner costs about $10,000 and consumes a lot of power. Both companies have accessed similar power consumption rates at about $0.028 per kilowatt-hour (kWh).

How fast is Riot Blockchain growing?

Riot's revenue soared 1,702% year over year to $122.4 million in the first nine months of 2021. However, that year-over-year comparison is a bit misleading, since Riot significantly expanded its mining fleet throughout 2021 (both organically and through its acquisition of Whitstone), more than tripled its own Bitcoin production, and benefited from Bitcoin's 740% price appreciation since the beginning of 2020.

By comparison, Marathon's revenue increased 5,162% year over year to $90.2 million during the same period. But unlike Marathon, which posted much wider operating and net losses in the first nine months, Riot significantly narrowed its operating loss from $18.5 million to $2 million. After factoring in its investment-related gains from its share-swap deal with Mogo, Riot actually booked a net profit of $11.5 million.

Analysts expect Riot's revenue to rise 1,709% for the full year, then increase another 107% to $452.8 million next year. Investors should be deeply skeptical of those forecasts since they're tethered to Bitcoin's unpredictable prices, but Riot's stock actually looks undervalued at eight times next year's sales.

Marathon, which is expected to grow a bit faster than Riot because it's expanding its mining fleet more aggressively, trades at just seven times next year's sales. However, Marathon's valuations were recently depressed by an upsized $650 million convertible debt offering and an SEC subpoena related to its usage of restricted stock to fund a data center deal.

Riot raised $600 million with a secondary stock offering in the third quarter, but it didn't take on any additional debt. As a result, Riot's debt-to-equity ratio remains low, at about 0.2, while Marathon's ratio will climb to nearly 1.0 after its latest convertible debt offering. Riot also previously face a lengthy SEC investigation, which started in 2018 after its transformation from Bioptix, but that probe ended last January without any charges being filed.

Is it the right time to buy Riot Blockchain?

Riot is growing at a slower pace than Marathon, and its stock is a bit pricier. However, Riot is also more profitable and less leveraged than Marathon, and it doesn't face any regulatory challenges.

If you believe Bitcoin's price will continue to rise over the next few years, Riot's stock is still worth buying. Its business looks a lot less speculative than it did a year ago, and it enjoys an early mover's advantage in the nascent Bitcoin mining market. However, investors should be prepared for a rough ride, since shares of Riot, Marathon, and other similar companies will continue to rise and fall in tandem with Bitcoin's volatile prices.