Back in 2018, Marathon Patent Group -- a tiny patent holding company which had been accused of being a "patent troll" -- started to buy thousands of ASIC miners to expand its Bitcoin (CRYPTO: BTC) mining business. In early 2021, it rebranded itself as Marathon Digital Holdings (MARA 2.21%) to reflect its transformation into a pure play Bitcoin miner.
Many investors scoffed at Marathon's rebranding, which seemed like an obvious attempt to hop aboard the BTC bandwagon and drive up its stock price. But if you had invested $2,000 in Marathon on Feb. 7, 2018 -- the day it placed its first major order of BTC miners -- your investment would have grown to $14,357 at the peak of the growth stock rally in November 2021 before shrinking to about $5,000 today. Let's review what happened to Marathon to see where its stock might be headed.
Image source: Getty Images.
How Marathon became the world's biggest BTC miner
Marathon's BTC plans were risky, but it eventually became the world's largest BTC miner, with a fleet of 199,200 energized miners at the end of December. Its closest competitor, Riot Platforms, had deployed 112,944 miners.
Marathon mined an average of 59.8 BTC per day in December, while Riot was producing only 18.2 BTC daily. Marathon pulled ahead of Riot by expanding more aggressively. In the past year alone, Marathon opened two new plants, launched a new mining joint venture in Abu Dhabi, and agreed to buy multiple BTC mining sites for $179 million.
Why did Marathon's stock plunge from its 2021 highs?
Marathon's entire business relies on the price of BTC, which needs to rise fast enough to offset the rising costs of purchasing and energizing its miners. That business model seemed sustainable when BTC's price peaked at nearly $69,000 in November 2021 -- but it nearly crumbled when BTC's price plunged to about $16,000 by the end of 2022.
BTC's price plunged for two reasons. First, rising rates drove investors away from speculative investments like cryptocurrencies. Second, the broader crypto market was rattled by regulatory threats and the failures of several high-profile exchanges and tokens.
In 2022, Marathon's revenue declined 21% to $118 million as its net loss widened from $36 million to $687 million. To make matters worse, the Securities and Exchange Commission (SEC) launched a probe into Marathon's joint venture with Beowulf Energy in Montana, which had enabled it to secure power for its data centers at favorable rates. Marathon eventually abandoned that joint venture in mid-2022, but the SEC probe hasn't been fully resolved yet. It also had to restate its financial reports for 2021 and 2022 after discovering "certain accounting errors" in early 2023. That ugly mix of declining sales, widening losses, regulatory challenges, and accounting issues all caused Marathon's stock to plummet 90% in 2022.
Why did Marathon's stock bounce back?
Marathon's stock lost another 29% of its value in 2023 as the crypto winter dragged on. But over the past six months, its stock rallied more than 70% as BTC's price rose 45%. BTC bounced back as interest rates stabilized and investors gradually shifted toward riskier growth plays and cryptocurrencies again.
As of this writing, BTC's price has risen to nearly $44,000. Based on that growth trajectory, analysts expect Marathon's revenue to have more than tripled to $359 million in 2023 as it squeezes out a net profit of $13 million. By comparison, they expect Riot to have generated $294 million in revenue as it narrows its net loss from $510 million to $184 million.
Marathon's growth rates are more impressive than Riot's, but both miners could see their mining costs jump when the next BTC "halving" -- which halves the rewards for BTC mining every four years -- occurs in the first half of 2024. The halving will likely boost BTC's price by reducing its supply, but Marathon and Riot will also need to deploy more miners to keep up.
That said, Marathon is still in a strong financial position with a low debt-to-equity ratio of 0.3. Its total cash and BTC holdings also exceeded its total debt for the first time in its latest quarter -- so it still has plenty of room to expand its business.
It's a speculative play with a lot of upside potential
Marathon Digital is still a speculative stock which could go through some wild swings with BTC this year. But if you believe BTC's price will continue to rise as Marathon consolidates the mining market, then it might still be a great time to buy the stock -- even though it might seem a bit pricey at 11 times its 2024 sales.
