2023-07-05 18:39:38 ET
Summary
- Riot Platforms is spending $168 million on new Bitcoin mining machines, set to nearly double its hash rate capacity by next year.
- The stock has been a big winner this year through solid operating results amid the rally in Bitcoin prices.
- We like the stock given its segment leadership and mining scale advantages.
Riot Platforms, Inc. ( RIOT ) is raising eyebrows with a fantastic 300% return year to date and gaining momentum in recent weeks. Recognized as one of the world’s largest Bitcoin ( BTC-USD ) miners, the company is benefiting from the strong rally in the price of BTC and overall improved sentiment towards the broader crypto sector.
We like RIOT for its segment leadership and see key advantages from its growing scale and vertically integrated business model that includes digital infrastructure and mining hosting services.
Indeed, that was the thesis from our bullish article back in January with the update today highlighting recent developments we believe support a positive outlook. With an expectation for more upside in the price of Bitcoin, RIOT is well-positioned to continue outperforming.
Riot Platforms' Deal With MicroBT
RIOT has announced a massive $163 million purchase order for 33,280 new mining machines through a partnership with “MicroBT Electronics Technology Co Ltd.”. The deal is set to nearly double its currently deployed hash rate capacity of 10.5 EH/s to approximately 20.1 EH/S by mid-2024.
These include the latest “Whatsminer M56S+ and M56S++” models of application-specific integrated circuit ((ASIC)) bitcoin mining, with the latter setting a company benchmark in efficiency at 22.0 Joules/TH through immersion-cooling with a hash-rate capacity of 230TH/s each.
source: MicroBT
According to the press release, RIOT is also securing the option to purchase an additional 66,560 miners by the end of next year which would take the potential hash rate to a total 35.4 EH/s. This new set of miners from MicroBT represents a key part of an ongoing vision of being “the world’s leading Bitcoin-driven infrastructure platform”.
The machines will be manufactured by MicroBT in the United States for deployment at Riot’s Corsicana, Texas facility currently under construction. Riot’s existing Rockdale, Texas site is already the largest Bitcoin mining facility in the world with an ongoing expansion expected to achieve a total self-mining hash rate capacity of 12.5 EH/s still this year.
source: company IR
What’s Next For Riot Platforms?
A key point about Riot’s latest mining expansion is that it works to keep up with industry peers like Marathon Digital Holdings, Inc. ( MARA ) and Core Scientific, Inc. (CORZQ) in terms of announced hash rate deployments and potential long-term capacity.
For context, MARA last announced an “operational hash-rate” of 15.2 EH/s and 20.1 EH/s on installed capacity including machines currently offline. Core Scientific, for its part, is reporting 14.9 EH/s of self-mining capacity and upwards of 22.1 EH/s including colocation-hosted services for its data center customers.
In other words, Riot’s 20.1 EH/s in hash rate capacity expected by the end of next year for RIOT keeps the company within the top of the rankings. Looking further out, assuming Riot exercises its full agreement with MicroBT for 66,560 additional miners with upwards of 35.4 EH/s total capacity, the path here is to take the crown with the largest deployment the industry has seen with concrete terms thus far.
This is important because the experience back at the height of the last bull market in late 2021 was a shortage of supply for new mining machines and some companies even making deals at inflated prices. By this measure, Riot has taken a proactive step signaling confidence the trend in Bitcoin is higher.
Riot Platforms in Numbers
To get a sense of the scale, RIOT reported mining 676 Bitcoins during May with an implied market value of $20.3 million at the current market price. The incremental capacity assuming the new machines from the MicroBT deal were immediately deployed at the current network difficult would allow Riot to mine upwards of 1,300 Bitcoin per month representing a market value of $39 million, or an annualized run rate of $468 million.
This would be further supplemented by the separate business proceeds from engineering and hosting services including the participation in the Texas ERCOT demand response programs which reimburses the company for curtailing power usage during extreme conditions.
All this is in the context of operating in an environment where the company is reporting a direct cost to produce a single Bitcoin at $9,438 in Q1 . Simply put, the investment in the mining machines with MicroBT essentially pays for itself within one first year.
Notably, the company's investment plans are backed by a strong debt-free balance sheet with $188 million in cash and more than $200 million of liquidity by holding 7,094 Bitcoin at the last quarter's end.
source: company IR
These numbers are consistent with the current consensus estimating RIOT will reach $370 million in net revenue this year, climbing to $514 million in 2024. At the same time, Riot is not expected to reach GAAP profitability over this period considering the intensive Capex spending related to the new Corsicana infrastructure build-out.
There are some big assumptions here but it’s also clear to see the upside potential in a scenario where Bitcoin prices take a leg higher. By our calculation, a Bitcoin price above $40k would be required to achieve a net income breakeven run rate immediately.
The equity value trading at just 5x forward revenues net of cash is a bargain in our opinion for what we view as one of the higher-quality names in the segment.
Seeking Alpha
Riot and the Looming Bitcoin Halving
Here we can bring up the proverbial "white elephant" in the room which is the looming Bitcoin halving expected by May 2024 where the network award will drop to 3.125 per block compared to the current 6.25 level. This means that over a full year, the number of Bitcoins to be mined will drop by half thereby limiting the earnings potential for all miners.
This is a topic worthy of a separate discussion, but the idea for RIOT is that by at least doubling its capacity- the company will be able to at least keep up with the current revenue run rate as a baseline while also benefiting from climbing margins as the Capex requirements normalize.
One line of thinking is that across the Bitcoin network, a large portion of "legacy" mining machines meaning older models from smaller operations will become obsolete and thus unable to profitably mine Bitcoin given the smaller reward potential.
This opens the door for leaders like RIOT with the newest generation of efficient technology including the latest Whatsminer M56S++ to consolidate its network share as the difficulty level drops.
There is also a thought that higher transaction fees will balance some of the lost revenue leading to higher prices consistent with the greater scarcity. scarcity including.
Final Thoughts
Riot's positioning today is a reflection of the groundwork the company has laid down over the last several years as a pioneer in the industry. Investors can take solace in that the management team has proven to be credible by delivering on important milestones while staying consistent with a long-term strategy.
Our bullish conviction with RIOT starts with recognizing the upside in Bitcoin which we believe has emerged stronger from the "crypto winter" of 2022. Weathering the storm of the historic selloff last year, several crypto exchange failures, and the collapse of notable alternative cryptocurrencies; Bitcoin has cemented itself as a legitimate alternative asset class and the " gold standard" of digital assets ."
We see the direction of ongoing efforts towards regulation of crypto as ultimately benefiting Bitcoin further legitimizing its status, opening the door for further institutional interest and greater acceptance globally. Riot is poised to benefit from this environment, in our opinion.
In terms of risks, there is plenty to cover. A monitoring point here is the price of Bitcoin itself. We can watch the $25k level as an important area of technical support the bulls will need to hold. A scenario where macro conditions deteriorate including higher financial market volatility would likely pressure Bitcoin prices through a form of financial contagion.
For Riot, it will be important for the company to continue reaching its operational targets and deployments of announced mining machines. We want to see gross margins and cash flow trends improve sequentially over the next several quarters.
To the upside, bulls can start thinking about the $20 stock price level as the next target which we believe is on the table by the end of this year with room for an expansion in valuation multiples.
Seeking Alpha
For further details see:
Riot Platforms: Massive Bitcoin Mining Expansion Keeps Us Bullish