Is Marathon Digital Holdings (NASDAQ:MARA) stock worth it as a bet on a Bitcoin (CCC:BTC-USD) rebound? Maybe not as a rebound play, per se. But, based on the numbers, and assuming the crypto mining’s capacity expansion goes off without a hitch, there may be room for MARA stock to zoom higher in the coming months. Even if the price of the underlying digital asset fails to bounce back.
How so? Lower Bitcoin prices (around $36,150 today, versus prices above $63,000 back in April), may have dented expectations. Yet, given its direct mining costs, and even when assuming last quarter’s operating expenses (which included non-cash share-based compensation) will be its quarterly overhead going forward, this company could wind up a highly-profitable enterprise.
On the other hand, it’s understandable why investors have bid down what looks on paper to be an undervalued stock. Marathon may end up getting over 100,000 mining rigs online, generating hundreds of millions in revenue. But between the uncertainty of it actually putting these machines in operation, and factors such as an increasing difficulty rate, it’s far from guaranteed this company will be printing (mining) large sums of money by the start of 2022.
So, what’s the best move? For risk-hungry investors, entering a small position now may be worth it. But, tread carefully. Even as the numbers add up, it still gives off “too good to be true” vibes.
Lower BTC Prices May Not Spell Doom for MARA Stock
Marathon shares may be down due to the big declines in Bitcoin prices. But, even if the popular crypto remains at or near today’s price levels, we could still see the MARA stock share price make a stunning recovery. How so? If the company hits the mining production levels it’s touted over the past few months.
Last month, it mined 226.6 BTC (worth around $8.32 million at today’s prices). In a few month’s time, this production number is projected to go up substantially. By the first quarter of 2022, it expects to have around 103,120 mining rigs in operation. This means daily production of 55-60 bitcoins, or between 20,075 and 21,900 per year. Even if prices hold steady, that’s an annual revenue range of around $740 million to $807 million.
At today’s prices (around $22.30 per share), its market capitalization totals around $2.5 billion. At this valuation, is there room for shares to run, as these projections turn into tangible results? Yes, given the relatively low direct mining costs per coin ($4,541), the company’s eventual operating margins could be massive.
And, that’s after accounting for overhead costs. Last quarter, Marathon had around $53.8 million in operating expenses (outside of direct mining costs). But, a disproportionate amount of this came from share-based compensation, resulting from the stock’s big run-up earlier this year.
In short, annual overhead may not end up being $200 million+ on an annual basis. Yet, even if it is, in theory, the company could be generating at least $500 million in operating profits per year. That’s more than enough to support a substantial increase in its valuation.
What’s The Catch Here?
Are Marathon’s projections too good to be true? The math may back it up. Admittedly, though, there’s got to be a catch. Otherwise, investors wouldn’t be pricing this stock today at around 5x its possible 2022 operating profits.
Why is the market discounting its possible future success? Two reasons. One, it’s not set in stone that the company will hit production of 55-60 bitcoins per day by the start of 2022. If the company hints that its scaling up will hit a delay, investors may overreact, resulting in another sell-off in MARA stock.
The company could also fall short of expectations another way, due to the ever-rising rising Bitcoin mining difficulty rate. In a nutshell, this rate measures the amount of computing power necessary to mine 1 BTC. With this rate steadily climbing over time, the company’s current and upcoming computing power may not be enough to generate 55-60 coins per day.
To top it all off, BTC may not have yet found its floor. It may be down from its highs. But, between the pivot towards altcoins, and the possibility of another crypto crash, we could see another round of declines down the road.
Bottom Line: Worth a Speculative Position, but Be Careful
The jury’s still out whether Marathon hits the projections it’s currently touting. But, if it does live up to expectations? Shares could see substantial gains from today’s levels. And, that’s assuming BTC prices hold steady from here. If they bounce back? Shares could see an even more substantial rebound.
So, as a high-risk/high possible return play, is MARA stock worth it? Yes, but be careful. There’s still a chance projections are too good to be true, and its mining ramp-up fails to live up to expectations.
On the date of publication, Thomas Niel held a long position in Bitcoin. He did not have (either directly or indirectly) any positions in any other securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.