Bitcoin (BTC -0.64%) has shaken off some cobwebs, up more than 50% this year. Riding that momentum is one of the leading Bitcoin miners, Riot Platforms (RIOT -1.49%), up an astounding 210% in 2023 alone.
The company released its Q2 2023 earnings report recently, and while it was a bit of a mixed bag, over the long term, Riot is in a position to dominate the Bitcoin mining industry. With fresh insights, it is becoming abundantly clear Riot is a no-brainer for investors looking for crypto exposure and easily the best option among publicly traded Bitcoin mining companies.
Image source: Getty Images.
Sideways production
In Bitcoin mining, hash rate is one of the most important metrics to analyze as it measures a company's computational power to mine Bitcoin. The thinking goes, the greater the hash rate, the more production. And when it comes to hash rate, Riot consistently ranks among the top.
Hitting a new record of 10.7 exahashes per second (EH/s) in Q2, Riot's hash rate was up just 2% from last quarter but increased more than 143% year over year, a promising sign that Riot is expanding its mining capacity over the long term.
Total production took a slight hit this quarter as the company mined 1,775 Bitcoins, an increase of 27% from last year but down from its all-time high in Q1 2023 of 2,115 Bitcoins. Fortunately, Bitcoin's price rally helped revenue grow 4% from the previous quarter despite the decrease in production.
Although revenue growth, production, and hash rate were relatively lackluster, Riot's continued growth in mining gross margin is encouraging. Up to 70% this last quarter and marking three consecutive increases, widening margins indicate the company can cover its direct production costs more effectively and ultimately inch it closer to generating net profit.
A unique business model
Electricity costs are one of the primary expenses for mining companies, and Riot's effective energy strategy is how it distinguishes itself from the competition.
Due to Riot's strategic location in Texas, it can implement a unique business model. Texas has an unregulated electricity market, allowing consumers to sell unused energy to the grid and enabling Riot to earn power curtailment credits to offset costs. This is especially helpful when the cost of energy is greater than the profits it would secure from mining, a scenario that happens when either the grid is under high demand or Bitcoin's price slips. When this happens, Riot can divert the energy back to the grid and still earn a profit.
Riot's power curtailment credits came in handy this quarter as total expenses increased 30% from last year. The company attributed this to expansion efforts at its Rockdale Facility, which required more staff and maintenance costs.
Despite growing expenses, Riot lowered its average production costs for the third quarter in a row. With average costs of just $8,389 per Bitcoin mined, Riot's distinct energy model and resource utilization make it the industry's most cost-effective miner.
Built for the long term
An integral part of Riot's goal of becoming the world's leading Bitcoin miner means expanding its capacity. Fortunately, a recent agreement with MicroBT, a producer of Bitcoin mining equipment, will do just that. With nearly 100,000 miners slated for delivery over the next two years, Riot will likely increase hash power by more than 200% to 35 EH/s, a level that would significantly outdo competitors.
These new miners will need a home, and Riot has one. Construction of its massive 1 gigawatt Corsicana Facility in Navarro County, Texas, is already underway, with the first phase expected to be complete by Q1 2024, bringing 400 megawatts of power online.
Although expansion of production and energy strategy is crucial for miner profitability, arguably the most attractive aspect of Riot is its unparalleled financial health. As it stands, Riot holds zero long-term debt, a feat none of its peers can come close to.
With virtually no debt, the company can put all its cash flow toward production and ensure it can weather any turbulence in the Bitcoin market. Additionally, Riot has $289 million in reserves and 7,265 Bitcoins valued at more than $200 million, providing a significant cushion to manage unforeseen costs that might arise when constructing new facilities.
Data source: YCharts
Looking forward
While some miners, albeit not very many, produce more Bitcoins than Riot, none come close to its combination of low costs, efficiency, and financial well-being. Even though the shares remain highly correlated to Bitcoin's underlying price and the company has posted five quarters of net losses, Riot is better positioned over the long term than any of its competitors.
Likely the only obstacle separating Riot from turning a profit is a rebound in Bitcoin's price. Until that day comes, which is likely a matter of "when" rather than "if," Riot should be able to endure market uncertainties without sacrificing liquidity, a luxury its competitors can't afford.
With shares currently down almost 50% in the wake of Q2 earnings and the subsequent broader market slump, investors seem to be focused on the near term. Instead, investors might be better off zooming out, understanding Riot's long-term prospects, and approaching the recent sell-off as a reason to grab a piece of the Bitcoin mining industry's clear-cut leader at a discount.
