Marathon Digital Holdings: Dilution Keeps Bitcoin Mining Venture Afloat
[Marathon Digital Holdings, Inc.(MARA)](/symbol/MARA?source=content_type%3Areact%7Csection%3Amain_content%7Csection_asset%3Ameta%7Cfirst_level_url%3Aarticle%7Csymbol%3AMARA)
Summary
– Marathon Digital Holdings has a history of being in trendy businesses but has not been profitable.
– MARA’s valuation is difficult to determine, and their focus on hash rates rather than profits is concerning.
– MARA relies on issuing shares and is expected to continue suffering negative earnings per share.Strong sell recommendation.
Marathon Digital Holdings, Inc.(NASDAQ:
MARA) has always fascinated me.I remember trading the stock back when it was Marathon Patent Group.
Those were the days when MARA was valued on the patents they owned.In 2015, Patents were very popular, and I remember reading all of IP Hawk’s articles here on Seeking Alpha about MARA.I only tell you this to provide perspective on how long I have followed this company.
I also tell you this, so you understand MARA has been in trendy businesses before.
It hasn’t worked out yet for MARA in its long history, but MARA continues to get financing and stay alive.
To say I wasn’t surprised in 2017 when they jumped on the blockchain train and started mining digital assets is an understatement.It was just the type of move I would predict from MARA.
In 2021, the move seemed to pay off and MARA exploded to the upside reaching $75 a share in November 2021.Since then, it has fallen pretty hard losing some $75%.
Valuation
It’s difficult to value MARA.When I listened to their recent earnings call, they talked a lot about hash rate.However, a look at their
income statement and balance sheet tells the story.
During their recent
earnings call Brandon B.asked management a pretty direct question, “What is the minimum bitcoin price that would allow you to sustain for profitability based on current operating costs, would it be Fred?”
Marathon Digital Holding’s CEO, Fred Thiel, gave this confusing response,
“So, the breakeven price if you would of Bitcoin Mining is very dependent on global hash rate and current energy prices and obviously the price of Bitcoin.So it really is a very complex kind of question.But essentially, we’re constantly optimizing our operations to make sure that we’re operating with the right mix of hash rate dependent on the energy cost and the price of Bitcoin.
So I think as you kind of look at Bitcoin pricing, you can kind of look in the rearview mirror at where our average cost to mine at Bitcoin was in Q1.And as you roll forward, an expectation would be essentially to look at growth in the global hash rate and what projections for energy pricing are going forward, which for the summer months we may see obviously some seasonality in energy pricing in certain markets, due to just weather driving more demand for energy or less.But our expectation is that obviously more hash rate will continue to come online and so that kind of breakeven point will continue to edge up sort of month-by-month.”
There was no range of values in this response.In fact, the very words profitable were seemingly lost amongst breakeven points and global hash rates.This highlights the main problem for MARA.
The pursuit of hash rates gives little consolation to investors that see Marathon posting losses and burning cash.
Now I don’t claim to be an expert on hash rates, but I know a little bit about operating income and as a business owner, MARA’s looks frightening.At the current rate, they will blow through their current cash without additional financing.
The earnings per share don’t look all that great either.Yet, Mara reduces debt and grows cash every year despite losing hundreds of millions.If you think this was the magic of bitcoin, you would be mistaken.
Mara does sell some bitcoin, but the money is not enough, so they finance the majority of operations by issuing shares.Diluting current shareholders and selling the dream of bitcoin mining.Allegedly, they are one of the best bitcoin miners out there.
According to the CEO,
“We’re becoming more diversified, more sophisticated and as a result more resilient.We’re smarter now than we were a year ago and ultimately in a much better position.
We’re a company with a strong balance sheet, a roadmap to hitting our primary target of 23 exahashes of capacity near the middle of this year, a growing team of subject matter experts, a technology stack that is becoming increasingly more vertically integrated and efficient and a unique approach to mining that’s allowing us to effectively expand our hash rate to support the Bitcoin network.”
These words did not comfort me because I remember that MARA used to be one of the leading patent companies out there.I also remember how that ended.
I think somewhere along the line MARA forgot about profits and just started focusing on being.If MARA was a zen guru, this would be commendable, but as a public company that sells a lot of stock; I believe it is a problem.
Risks to the Upside
One of the primary risks in shorting Marathon comes from the potential of Marathon to issue promotional publicity that causes major price appreciation over short time periods.The company has spiked over $50 a share twice in the last five years.Although these spikes have been short-lived, I wouldn’t want to be on the wrong side of a volatile stock like Marathon.Short sellers should consider using puts instead of just shorting shares to limit the downside of the trade.
The 4/19/2024 $13 dollar puts were how I established a position.
Marathon also does mine bitcoins and Marathon holds a total of 12,964 Bitcoins (
BTC-USD).If the value of bitcoins goes up over $100,000 the value of Marathon’s holdings would be worth over a billion dollars.Since they continue to add bitcoins to their stockpile every month, the value of bitcoin matters.A large rise in the value of bitcoins could also make Marathon rise in tandem.Conversely, a large drop in bitcoins value would be quite harmful to Marathon’s value.
Marathon could also introduce new technologies or better methods of mining bitcoins that could prove profitable in the future.
Conclusion
If nothing changes, MARA will continue to issue shares and continue to suffer negative earnings per share due to a high burn rate.
I would consider any rise in Marathon’s shares to be temporary.I rate MARA a strong sell and would not buy at any level.As always please do due diligence before buying or selling short any equity.Thanks for reading and I look forward to hearing from you in the comments.
This article was written by
Analyst’s Disclosure: I/we have a beneficial short position in the shares of MARA either through stock ownership, options, or other derivatives.I wrote this article myself, and it expresses my own opinions.I am not receiving compensation for it (other than from Seeking Alpha).I have no business relationship with any company whose stock is mentioned in this article.
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