In late 2020, Marathon Digital (MARA 5.63%) transformed from a patent holding company into a Bitcoin (BTC 1.59%) mining one. It abandoned its original business model, poured all of its cash into Bitcoin miners and Bitcoin purchases, and emerged as one of the market's leading "pure play" Bitcoin mining companies.

As a result, Marathon's stock price soared above $80 in November 2021 as Bitcoin's price topped $65,000. But today, Marathon's stock trades at about $7 a share -- even though Bitcoin only lost roughly 60% of its value during that same period.

Marathon's stock dropped further than Bitcoin's price for three reasons. First, rising interest rates drove investors away from unprofitable tech companies with decelerating growth, high debt, and low cash reserves. Second, Marathon expanded its fleet of miners at a much slower rate than it had originally anticipated. Lastly, it was rattled by a Securities and Exchange Commission (SEC) probe regarding a joint venture last year and recently disclosed some accounting issues.

Bitcoin tokens on a circuit board.

Image source: Getty Images.

That's why it wasn't surprising that 35% of Marathon's shares were still being shorted as of Feb. 27. But could this out-of-favor stock bounce back this year if Bitcoin's price stabilizes and it resolves its near-term challenges?

How much Bitcoin does Marathon own?

Marathon held 8,260 Bitcoins, which had a market value of about $191 million, and $220 million in unrestricted cash as of March 1. It mined 683 BTC in February, but it also sold 650 BTC during that month to cover some of its operating expenses. By comparison, Marathon's main rival Riot Platforms mined 675 BTC in February and sold 600 BTC.

Marathon also regained 3,132 in unrestricted BTC on March 8, which brings its total holdings to about 11,392 BTC, after terminating its credit facilities with the failed Silvergate Bank. Silvergate returned that BTC, which had been held as collateral, after Marathon prepaid its outstanding debt of about $50 million. 

Is Marathon still expanding?

Back in December 2021, Marathon claimed it could bring 133,000 Bitcoin miners online by mid-2022. But as of March 1, it had only deployed roughly 90,000 miners. Riot operated a fleet of 87,264 miners at the end of February, but 17,040 of those miners remain offline due to a winter storm in Texas last December.

Marathon and Riot both gauge their Bitcoin mining efficiency in terms of exahashes per second (EH/s). Marathon had a capacity of 9.5 EH/s at the end of February, which is only slightly lower than Riot's 9.8 EH/s but far below its original goal of reaching 13.3 EH/s by mid-2022.

Marathon claims it can increase its capacity to 23 EH/s by the middle of this year, but I'm skeptical that it can achieve that goal after broadly missing its own targets last year. Riot only expects to reach 12.5 EH/s by the second half of 2023.

Can Marathon overcome the near-term headwinds?

In late 2021, the SEC started to probe Marathon's joint venture with Beowulf Energy, which was supplying power to its data center in Montana at favorable rates. That investigation ended after Marathon dissolved the joint venture last September.

But Marathon isn't in the clear yet. It recently postponed its fourth-quarter earnings report, which had been scheduled for Feb. 28, to resolve "certain accounting errors" and restate its quarterly reports for the first three quarters of 2022 as well as its annual report for 2021. It warned that all of its original filings "should no longer be relied upon," but it also said the restatements would not impact its previously reported "total margin, operating income, or net income."

Therefore, we can still assume that Marathon's net loss widened from $10 million in 2020 to $36 million in 2021, then widened to $280 million in the first nine months of 2022 as Bitcoin's price plunged and energy prices rose. Its production update at the end of March also suggests it has about $411 million in total liquidity (Bitcoin holdings and unrestricted cash).

Marathon ended the third quarter of 2022 with $805 million in total liabilities and a debt-to-equity ratio of 1.3, but that leverage was reduced after it terminated its credit facilities with Silvergate. However, investors shouldn't put any faith in those estimates until Marathon files its updated quarterly and annual reports.

Will Marathon's stock head higher in 2023?

With an enterprise value of $1.4 billion, Marathon trades at about 3 times its estimated 2024 sales. Riot, which doesn't face any near-term regulatory or accounting issues, trades at 2 times its 2024 sales.

If Bitcoin's price continues to rise, Marathon and Riot could both rally through the end of 2023. However, I expect Marathon to underperform Riot -- as it has over the past 12 months -- until it resolves its near-term problems and achieves its capacity targets for mid-2023. So for now, I'd personally buy Riot instead of Marathon as a speculative Bitcoin mining stock.