MicroStrategy (MSTR 3.38%) and Riot Platforms (RIOT -1.49%) represent two different ways to invest in Bitcoin's (BTC -2.32%) rally of about 150% this year. MicroStrategy is a software company that started hoarding Bitcoin over the past three years. Riot is a leading Bitcoin mining company that mines BTC with its massive fleet of high-end miners.
Both stocks have skyrocketed this year, along with Bitcoin's price. MicroStrategy's stock has risen more than 290% this year, while Riot's stock has rallied more than 310%. Should investors chase either of these high-flying Bitcoin-related stocks right now?
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MicroStrategy operates two different businesses
At its core, MicroStrategy is an aging data mining and analytics company founded 34 years ago. It's expanded its ecosystem with more mobile and cloud services over the past two decades, but it's been struggling to keep pace with higher-growth cloud giants like Salesforce, Microsoft, and Amazon in the rapidly evolving market. That's why MicroStrategy's revenue grew at an anemic compound annual growth rate (CAGR) of less than 1% from 2010 to 2020.
But in August 2020, MicroStrategy's co-founder and then-CEO Michael Saylor drove the company to start spending the software segment's cash on big Bitcoin purchases. Its BTC holdings have risen from $250 million in its first big purchase to $4.7 billion in its latest quarter. That's more than 40% of MicroStrategy's current enterprise value of $9.4 billion.
MicroStrategy currently holds 158,400 BTC on its balance sheet at an average purchase price of $29,586 -- so its investment is back in the black as of this writing. However, its rising BTC impairment charges also caused it to stay unprofitable over the past three years, while its issuing of fresh debt to fund its BTC purchases boosted its debt-to-equity ratio to 3.0. On the bright side, it's expected to return to profitability this year as it books lower impairment charges.
But as investors focus on its BTC investments, its core software business remains sluggish. Its total revenue only rose 1% year over year in the first nine months of 2023 as rising subscription revenue finally offset its declining product license and support revenues. Analysts expect its revenue to rise a mere 1% for the full year.
The bulls argue that MicroStrategy's enterprise value will eventually soar as it continues to buy BTC and stabilize its software business. However, a lot of growth could already be baked into its stock at 21 times next year's sales.
Riot is a more straightforward Bitcoin play
Riot was once a tiny patent holding company known as Bioptix, but it ditched its original business model and transformed into a dedicated BTC miner in 2017. It then purchased tens of thousands of top-tier Antminers from Bitmain.
Riot had deployed a massive fleet of 112,944 miners by the end of November, which enables it to produce an average of 18.4 BTC every day. It's been selling hundreds of Bitcoins each month to boost its liquidity, but it was still holding 7,358 BTC (with a market value of $306 million) on its balance sheet at the end of November.
Riot's business model is simpler than MicroStrategy's, but its fate is tethered to BTC's market price and volatile energy prices. In 2022, its revenue rose 22% to $259 million -- but its net loss widened from $8 million to $510 million as BTC's price plunged and energy prices spiked. However, analysts expect its revenue to rise 14% to $294 million this year as it narrows its net loss to $201 million.
If Bitcoin's price continues to rise as inflation cools off, Riot's revenues and profits could soar. It also plans to keep selling its excess power back to the grid at spot prices to stabilize its long-term operating margins. Riot can keep selling its own BTC to boost its cash flows, and its low debt-to-equity ratio of 0.1 still gives it plenty of room to raise more cash. And with an enterprise value of $2.9 billion, Riot looks a lot cheaper than MicroStrategy at 6 times next year's sales.
Better buy: Riot Platforms
I personally think it makes more sense to directly buy Bitcoin instead of investing in these two capital-intensive companies. But if I had to choose one, I'd pick Riot because its business model is more straightforward, its growth rates are more stable, its balance sheet is healthier, and its stock looks cheaper relative to its long-term growth potential.
