Marathon Digital Holdings (MARA 2.83%), which became a pure-play Bitcoin (BTC 5.06%) miner back in 2020, turned into a red-hot stock the following year as the market's demand for cryptocurrencies skyrocketed. Its shares soared above $80 last November, but they now trade at around $14.
The stock has tracked Bitcoin's price, which topped $65,000 last November before slumping below $20,000 at the beginning of this month. Bitcoin's price has seemingly stabilized above the $20,000 mark -- will Marathon's stock follow suit and recover?
An all-in bet on Bitcoin
Marathon was once a patent-holding company that generated most of its revenue from litigation and licensing fees. However, it abruptly abandoned that business model in late 2020 and bought tens of thousands of Antminer S-19 ASIC miners from Bitmain along with Bitcoins on the open market.
Marathon generated $150.5 million in revenue in 2021, representing 3,353% growth from 2020, when it was still a patent-holding company. At the end of that year, it held 8,133 Bitcoins after mining 3,197 of those Bitcoins on its own and purchasing the rest through its investment fund.
In the first six months of 2022, Marathon's revenue grew 99% year over year to $76.6 million. However, its net loss widened from $25.5 million to a staggering $204.6 million as the costs of buying and operating more miners -- which initially cost over $10,000 each -- offset its Bitcoin-related gains. Unless Bitcoin's price rises significantly or miner prices decline, those losses will continue to widen.
During the first half of the year, Marathon's cash and equivalents fell 49% year over year to $86.5 million. Its debt-to-equity ratio of 1.2, which was boosted by a convertible debt offering last year, leaves it some room to raise fresh funds going forward.
However, Marathon's main rival, Riot Blockchain (RIOT 0.93%), ended its latest quarter with a much lower debt-to-equity ratio of 0.1, mainly because it divested its stake in the crypto exchange Coinsquare in 2021 and sold some of its own Bitcoin to raise more cash in the first half of 2022.
Its mining fleet is still expanding
Marathon's mining fleet expanded to 34,000 active miners by the end of August, and it plans to bring an additional 65,000 miners online over the following three months. However, it notably missed its original target of bringing 133,000 miners online by the middle of 2022.
Bitcoin mining companies gauge their mining efficiency in terms of exahashes per second (EH/s). Marathon's current fleet produces 3.2 EH/s, and it expects the additional 65,000 miners to bring in an additional 6.9 EH/s. But once again, that combined capacity of 10.1 EH/s will still fall short of its original goal of reaching 13.3 EH/s by mid 2022.
As a result, Riot remains slightly ahead of Marathon in the mining race. At the end of August, Riot was operating a fleet of 46,658 miners, which were producing 4.8 EH/s. By the first quarter of 2023, it expects to deploy 115,450 miners with a total capacity of 12.5 EH/s. However, Marathon believes it will install "enough miners" to "generate approximately 23 EH/s near the middle of fiscal year 2023," according to a Sept. 6 operations update. But achieving that lofty goal will require lots of cash.
Lots of Bitcoins, lots of red flags
At the end of August, Marathon held 10,311 Bitcoins, which have a market value of about $220.5 million. Year to date through the end of August, it mined 2,222 Bitcoins on its own, which represents 26% growth from a year ago. By comparison, Riot held 6,720 Bitcoins, all of which it mined on its own, at the end of the month, even after converting some of its holdings to cash. Meanwhile, Marathon didn't sell any of its Bitcoins in the first half of the year. That strategy doesn't make much sense since its losses are widening, its cash reserves are dwindling, and its debt levels are rising.
Another pressing issue is the unresolved Securities and Exchange Commission (SEC) probe, which started last year. That investigation involves Marathon's joint venture with Beowulf Energy to supply power to its data center in Hardin, Montana, at favorable rates. If the SEC forces Marathon to dissolve that partnership, its energy costs will surge and its losses will widen. Riot Blockchain doesn't face any outstanding SEC probes.
It's easier to just buy Bitcoin
Marathon stock might be due for a near-term rally if Bitcoin's price stabilizes. But over the long term, Riot certainly seems like a more stable "pure-play" Bitcoin mining stock. It also seems more logical to simply buy Bitcoin instead of either of these capital-intensive mining companies.