Marathon Digital's (MARA 2.21%) stock has soared about 640% over the past 12 months. The bulls rushed back to the Bitcoin (CRYPTO: BTC) miner as the cryptocurrency's price stabilized and recovered from its steep decline in 2022. But is it too late to buy Marathon's stock after that massive rally?
How did Marathon become a pure-play Bitcoin miner?
Marathon was once a tiny patent holding company. But in 2020, it ordered tens of thousands of top-tier ASIC miners and rebranded itself as a pure-play Bitcoin miner.
Image source: Getty Images.
Many investors were initially skeptical of that plan, which sounded like a questionable way to profit from the market's soaring interest in Bitcoin. Nevertheless, Marathon consistently expanded over the following three years and became the world's largest Bitcoin mining company, with a fleet of about 184,400 active miners as of Dec. 1. Its closest competitor, Riot Platforms, operated a fleet of 112,944 active miners at the end of November.
Marathon produced an average of 38.4 BTC daily in November, which represented a 144% increase from a year earlier. Riot only produced 18.4 BTC daily, which represented a mere 6% increase from the previous year.
Marathon is scaling up its business at a much faster rate than Riot. Over the past year, it opened two new plants, launched a new joint venture in Abu Dhabi, and agreed to buy multiple BTC mining sites for $179 million in mid-December. Those bold moves will likely consolidate a large portion of the market and widen its lead against Riot.
How fast is Marathon growing?
Marathon generates most of its revenue from BTC mining. It also periodically sells the BTC it mines to boost its cash holdings. At the end of the third quarter of 2023, it held $101 million in cash and $287 million in BTC on its balance sheet. That marked the first time its total cash and BTC holdings exceeded its total debt.
Marathon's revenue soared from $4 million in 2020 to $150 million in 2021 as it deployed its first miners. But in 2022, its revenue declined to $118 million as BTC's price tumbled amid rising interest rates and other macro headwinds.
Looking ahead, analysts expect Marathon's revenue to more than triple to $359 million this year as BTC's price recovers and it significantly expands its mining operations. They also expect its revenue to rise another 47% in 2024 and 42% in 2025 -- but we should take those estimates with a grain of salt, because they're tightly tethered to BTC's volatile price.
What are Marathon's biggest weaknesses?
Marathon's revenues are soaring, but it isn't consistently profitable on a generally accepted accounting principles (GAAP) basis, and it's taking on a lot of debt to expand its mining operations. It ended its latest quarter with a manageable debt-to-equity ratio of 0.3, but its leverage could keep rising as it brings its new miners and plants online.
Marathon has also gotten a bit overheated after its year-long rally. With an enterprise value of $6.1 billion, it trades at about 12 times next year's sales. Riot, which is growing at a slower rate than Marathon, trades at just 8 times next year's sales.
Another looming challenge is the imminent Bitcoin "halving," which cuts the rewards for mining BTC in half every four years. The last BTC halving occurred in 2020, so the next halving should happen in the first half of 2024. That event will likely boost BTC's market price, but it will also require Marathon to deploy more miners to mine the same amount of BTC.
Bitcoin's halving might coincide with the end of the "crypto winter" and light a fire under BTC's price again. If that happens, the soaring price of BTC should offset the higher costs of mining and significantly boost the cash value of its BTC reserves. But if BTC's price fails to take off, its mining costs will soar and its losses will widen.
It's not too late to buy Marathon if you're a BTC bull
Marathon Digital is still a highly speculative stock, but it could still have room to run if you believe Bitcoin's price will hit new highs over the next few years. I'd personally prefer to directly buy Bitcoin on the open market than invest in Marathon's capital-intensive business, but this mining stock could still outperform BTC over the long run as it scales up its business.
