Investment Thesis Marathon Digital Holdings Inc.(NASDAQ: [MARA](https://seekingalpha.com/symbol/MARA)) is a digital asset mining and technology company that focuses on the generation of digital assets and cryptocurrencies, most namely Bitcoin ( [BTC-USD](https://seekingalpha.com/symbol/BTC-USD)).Although headquartered in Fort Lauderdale, Florida, the company conducts most of its operations out of Texas and North Dakota.MARA is one of, if not the largest public BTC mining companies in the world, with a current market cap of $5.2 billion.
While BTC, cryptocurrency, and decentralized finance might be the near future that some people see, I can’t see it yet.With the [halving of BTC](https://www.ig.com/en/bitcoin-btc/bitcoin-halving) expected in April of 2024, I expect the main revenue driver of MARA to literally get cut in half.I cannot see the future in which MARA deserves to keep its current value.
This year we have seen the price of MARA stock soar over 450% last year, mainly fueled by the increased price of BTC, which rose 162% YOY.However, the company has yet to have a positive operating income since [2016](https://seekingalpha.com/symbol/MARA/income-statement).The company also has never had a positive EPS for any year, and continues to [dilute](https://ycharts.com/companies/MARA/shares_outstanding) their shares.
If you believe in BTC and want exposure, consider just purchasing some BTC outright as opposed to investing in MARA.By almost every valuation metric this company is overvalued, with their P/E FWD coming in at a very poor 355x.Although, this is still higher than their peers such as [RIOT](https://seekingalpha.com/symbol/RIOT) or [HUT](https://seekingalpha.com/symbol/HUT) who still don’t have projected earnings for next year.This poor valuation and profitability could be forgiven with companies who operate in proven growing and next-generation industries such as EV or Biotech.In my opinion, the industry of BTC miners will be forced to shrink and consolidate by BTC halvings and will be forced to eventually operate off fees alone.This means that the longevity and success of the company rests solely on a mainstream adoption of BTC, or at the very least a massive increase in usage from where it is today.
That’s a risky bet.To me, BTC is used as an investment vehicle first and a real currency after, and I don’t see that changing any time soon.For those reasons, I give MARA a “Sell” rating for the time being and would advise against an entrance at its current price.Revenues & Profitability MARA’s revenue is mainly derived from the mining of BTC and the capital gains on its current reserve of BTC.As not only is BTC what the company mines and generates revenue from, but it is also mainly what the company holds, with the company holding a stack of [15,174](https://ir.mara.com/news-events/press-releases/detail/1337/marathon-digital-holdings-announces-bitcoin-production-and) BTC as of Dec 2023.This equates to a worth of around $667 million at BTC’s current price of $44,000.So as the price of BTC goes up, the positive effect is seen on the balance sheet and the income statement as the company generates more capital gains on its generated assets, both newly made and held.This can compound positive momentum in BTC but can also compound negative momentum in BTC, basically leaving the overall financial health of the firm to the whims of the market.
The company has also benefitted from a large increase in BTC transactions, which has seen over [500k](https://bitinfocharts.com/comparison/bitcoin-transactions.html#3y) transactions per day become a norm, having struggled to break over 300k since late 2021.This has led to a significant increase in transaction fees, collecting 380 BTC in fees in December, or roughly $16.7 million, representing a record 22% of their total BTC production.Along with this, the company has been improving its BTC mining efficiency increasing its energized hash rate (EH/S) 253% YOY, from 7.0 to 24.7.This comes from the continued rollout of their operations in [Abu Dhabi](https://www.coindesk.com/business/2023/05/09/marathon-digital-in-jv-for-immersion-cooling-bitcoin-mining-in-abu-dhabi/) and [Paraguay](https://seekingalpha.com/news/4031910-marathon-digital-builds-out-bitcoin-mining-project-in-paraguay) as well as an increase in their average percent of energized units stateside.MARA’s recent purchase of two new operational centers from Generate Capital has also been touted as being able to reduce the cost per coin mined by [30%](https://www.coindesk.com/business/2023/12/19/bitcoin-miner-marathon-digital-to-buy-new-mining-sites-for-179m/) by CEO Fred Thiel.The revenues for Q3 of 2023 were at record highs, at $97.8 million, but the profitability leaves a lot to be desired.
Although their revenues were at record highs, so were their cost of revenues and D&A.Their income from operations came in at a loss of $15.6 million, with their last operating income profit coming in Q4 of 2021.
However, they unexpectedly ended Q3 earning money, with their first positive EPS since 2021, coming in at $0.36.But this is derived mainly from the extinguishment of debt, which put [$82 million](https://ir.mara.com/news-events/press-releases/detail/1333/marathon-digital-holdings-reports-third-quarter-2023-results) on the company’s income statement, as opposed to their record revenues.Their EBITDA rose for the third consecutive quarter to $37.9 million but was offset by record D&A costs of $53.5 million.
Overall, if MARA was operating in a normal industry with these revenues, it would be much easier to make a “Buy” case.Their revenues are growing, the market seems to be growing, the company is investing in new operational centers that are showing promising results, and the focus on efficiency is yielding gains.Those are all things you love to hear in growing companies.However, this story is not a new one with MARA, with this same cycle occurring in 2021 where we saw the stock price reach as high as $70.The sustainability of these revenues and these profits leaves a lot to be desired, with BTC halving expected to hurt their largest revenue driver along with the already volatile market.SEC & BTC ETFs One of the largest drivers for the price of BTC in the past months has been the rumors swirling around a [possible approval](https://finance.yahoo.com/news/the-crypto-world-is-ready-to-take-bitcoin-etfs-to-the-masses-it-needs-the-blessing-of-a-longtime-foe-first-153427889.html) of BTC ETFs by the SEC.The thought of a BTC ETF has long been on the minds of crypto and finance entrepreneurs alike, as it has been the most viable way to provide exposure of BTC to retail investors on exchanges.
Some of these ETFs already exist on secondary or OTC markets, such as Grayscale Bitcoin Trust ( [OTC:GBTC](https://seekingalpha.com/symbol/GBTC)) and ProShares Bitcoin Strategy ETF ( [BITO](https://seekingalpha.com/symbol/BITO)).A decision by the SEC is expected imminently about the approvals of 14 high profile money managers, such as BlackRock ( [BLK](https://seekingalpha.com/symbol/BLK)) and Franklin Resources ( [BEN](https://seekingalpha.com/symbol/BEN)).
This decision is huge for BTC as it could be the biggest step thus far on integrating the cryptocurrency economy into the current financial world.This could open the door for large institutional investors to invest in the previously taboo cryptocurrency.With financial giants like JPMorgan Chase ( [JPM](https://seekingalpha.com/symbol/JPM)) and Goldman Sachs ( [GS](https://seekingalpha.com/symbol/GS)) already willing to help with this integration, the interest from these financial giants seems to be there, though to what extent is unknown.The price of BTC will no doubt vary wildly based on new information and could see an explosion if there is an approval.
This was seen in 2021 with the SEC approval of BTC futures ETFs such as BITO.However, we also saw a massive decline and loss of interest after that until this news for a new approval.
While no doubt that SEC approvals could be great for BTC, how MARA could benefit from its long-term remains to be seen.They would benefit from the increased value of BTC and would probably see increased revenues for a bit as BTC transactions are ballooned by institutional investors.However, this integration into the financial world puts MARA in the ring with some of the most valuable companies in the world.This could open the door to increased competition with more well-funded firms more willing to jump into the mix due to the increased opportunities for profit.There is no real moat or competitive advantage stopping this from happening.There is a barrier to entry as the industry is very capital-intensive and has high upfront costs, but well-funded firms could realistically compete.
This could also swing the other way and we could see massive investments in MARA as a result of this.BTC Halving (2024, 2028) Every 4 years, the incentive that miners receive for validating blockchain transactions, gets cut in half.The next halving is expected in April of this year, with the new reward being 3.125 BTC.Blockchain validation is the main revenue driver for MARA, representing at least 85%-90% of the firm’s BTC production in recent quarters.
This brings about a problem that I think MARA, and all BTC miners, inevitably face: their current business model is flawed and not sustainable, in my opinion.The hope is that the halving of BTC will lead to an increase in the price of BTC as there is less supply being added.Either way, I expect next year the BTC production of MARA will basically be cut in half, which is a lot to handle for the company as it is already struggling to make a profit at the current reward rate of 6.25 BTC.
A further halving expected in 2028 puts more pressure on MARA to pivot to a transaction fee-based business model.This also puts more pressure on the BTC stack of MARA to be a revenue generator, hoping that the appreciating price of BTC can continue to bring in capital gains for the company.There are upsides to BTC halving, as MARA is set up much better than other smaller miners that might be forced to sell their facilities as their margins shrink even more.This could see MARA benefit from being a bigger player in the space and could see them snapping up smaller players that could contribute to their existing operations.All MARA needs is to have enough free cash on their books to benefit from this potential opportunity.Financials & Valuations MARA is ending the year with $356.8 million in cash (not including BTC) on their books, compared to a total debt of [$325 million](https://seekingalpha.com/symbol/MARA/balance-sheet).MARA is also acquiring two operational centers from Generate Capital for roughly $178.6 million, which will come off their balance sheet in early January.
This means the company has around $178.2 million in cash left post-acquisition.The post-halving acquisition opportunities are going to have to be obtained with this remaining money, unless the firm can quickly raise some extra funds or sell some of their BTC stacks, both of which could hurt future earnings.The company saw their combined cash and BTC holdings exceeding their debt, for the first time in two years, at the end of Q3.However, this is because they converted more than half of their debt into equity at the end of Q3.MARA converted [$417 million](https://ir.mara.com/news-events/press-releases/detail/1326/marathon-digital-holdings-announces-completion-of-privately) of debt into equity at a 21% discount.
This action caused the number of shares outstanding to balloon by 18%, from 174.3 million to 206 million.It has since increased by a further 8% to 222.63 million.This dilution of shares puts downward pressure on the price.
There are no valuation metrics which put MARA in a positive light with EV/EBITDA ( [TTM](https://seekingalpha.com/symbol/TTM)), EV/SALES, and P/E FWD all being poor with each item earning [“F”](https://seekingalpha.com/symbol/MARA/valuation/metrics) ratings from the SA Quant.The company just simply does not have the revenue or the earnings to justify a price point of $26.
It previously did not have enough to justify its almost $70 price tag it reached in late 2021, and that is why we saw it have a rough crash back down to earth.Risks There are many risks that are facing MARA and the BTC economy as a whole.If you are investing in MARA, you are basically betting on a mainstream adoption of the use of crypto as a currency.In my belief, MARA, sooner or later, will have a fee-based business model.Unless you are just looking for a quick payday, this is a risky bet and one that is not helped by the repeated use of BTC as an investment vehicle rather than as a currency.
This will only be worsened by the approval of BTC ETFs and the acquisition of large amounts of BTC by institutional investors.Right now there are about 19.58 million BTC in circulation, with [over 15 million](https://www.coinspeaker.com/countdown-bitcoin-halving-2024-106/#:~:text=The%20Bitcoin%20halving%202024%20will,19.58%20million%20units%20in%20circulation.) of them being held by long-term investors.If BTC ETFs join the fray, the amount of coins that can be used as a transactional currency will be limited.This also limits the growth and creation of such institutions as BTC banks or the use of payment methods such as credit cards, which would likely be in the first transitional phases of BTC integration.Another major risk that is posed to all crypto mining firms is the debate around the energy usage of their facilities, along with the use of fossil fuels.
With the coming regulations and sometimes all-out banning of fossil fuel use, such as with [cars](https://www.cnet.com/roadshow/news/states-banning-new-gas-powered-cars/), there is pressure on companies to cut down or reduce the use the use of energy, specifically fossil fuels.
Crypto mining companies consume a massive amount of energy, and very little of it gets addressed by renewable energy.Some are lucky enough to be near dams or geothermal power, but most just use fossil fuels to run their operations.Marathon recognizes this as a major risk and is already taking measures to avert this, running [pilot programs](https://www.coindesk.com/business/2023/11/02/bitcoin-miner-marathon-tests-btc-mining-with-methane-gas-from-waste-landfill/#:~:text=Bitcoin%20miner%20Marathon%20Digital%20%28MARA,electricity%20to%20power%20mining%20operations.) to try and energize off methane gas from landfills, and their operation in Paraguay running [100%](https://www.globenewswire.com/news-release/2023/12/05/2790931/0/en/Marathon-Digital-Holdings-Announces-Bitcoin-Production-and-Mining-Operation-Updates-for-November-2023.html) off hydroelectric power.However, with most of its operations functioning off fossil fuels and using massive amounts of energy, the energy concern remains for MARA and most other mining companies.Other risks for the company I have previously addressed but remain: the possibility for increased competition by larger institutional investors during BTC integration, BTC ETF approval decisions, and BTC halvings.
Conclusion Overall, although I am intrigued and slightly bullish on some aspects of decentralized finance and BTC, investing in MARA is not how I would go about trying to gain exposure.It is overvalued by every metric, unable to turn consistent profits, has high volatility, has been diluting its shares, and I believe currently has a fundamentally flawed business model.At this price point, I am willing to give this a “Sell” and I think investors could and should be taking profits soon.Editor’s Note: This article discusses one or more securities that do not trade on a major U.S.
exchange.Please be aware of the risks associated with these stocks..
