I am initiating coverage on Marathon Digital (MARA) stock with a positive outlook. I believe that MARA stock looks attractive at current levels of $ 22.5. This coverage will discuss the positives and the potential risks.
Starting with the price action, Marathon stock touched highs of $ 83.45 with the surge in Bitcoin in the last quarter of 2021. However, the sharp rally was short lived as the stock declined in-sync with the decline in Bitcoin.
It seems that the correction is overdone in MARA stock. My view is underscored by the point that the stock trades at a forward P / E of 9.2. For the company with a high-growth trajectory, the valuations look attractive.
It’s worth adding here that Bitcoin seems to have bottomed out in the broad range of $ 35,000 to $ 40,000. Once the cryptocurrency trends higher, Marathon’s rally on the upside will be supported.
There are two reasons to be bullish on Bitcoin.
First and foremost, it’s likely that cryptocurrencies will be regulated in the United States. However, the Biden administration is looking at “responsible innovation.” The cryptocurrency world is positioned to survive and grow.
Furthermore, inflation is likely to translate into flow of funds to assets like precious metals, commodities and cryptocurrency. Bitcoin, with a limited supply of 21 million, is likely to trend higher as inflation persists. Estimates from Crypto.com also suggest that the number of crypto holders globally will increase to one billion by the end of 2022. With aggressive adoption of cryptocurrencies, the demand-supply scenario for Bitcoin will ensure upside.
Given these macro-factors, I am bullish on Marathon Digital, which is a leading Bitcoin miner. Let’s also talk about some company specific factors that are likely to be upside catalysts for MARA stock.
Upside Catalysts for Marathon Stock
Since I talked about low P / E valuations, let’s also talk about the revenue growth. For Q4 2021, the company reported top-line growth of 2,180% on a year-on-year basis to $ 60.3 million. Besides the robust headline numbers, there are two important points to note in the results.
First, as of December 2021, Marathon reported $ 623.7 million in cash and equivalents. Including cash and Bitcoin holdings, the total liquidity buffer was $ 1.1 billion. Marathon also had access to a $ 100 million revolving facility. Overall, the company has robust flexibility to pursue aggressive growth.
Second, Marathon increased the hash rate by 1,790% in 2021. As of December 2021, the company reported a total hashing capacity of 3.5EH / s.
Of course, the past results are discounted in the valuation. Coming to the potential growth, Marathon has some ambitious plans.
In the first part of the aggressive expansion, Marathon expects that hashing capacity will increase to 13.3EH / s by mid-2022. Furthermore, the company expects hashing capacity of 23.3EH / s by early 2023.
In terms of numbers, Marathon believes that the company can mine 66 Bitcoin per day by mid-2022. This is assuming a hashing capacity of 13.3EH / s. Also, let’s assume that Bitcoin trades at $ 40,000 at this capacity.
A simple calculation indicates that Marathon is positioned to deliver monthly revenue of $ 79.2 million. Further, the annual revenue potential at 13.3EH / s is $ 950 million. Marathon has also guided for blended mining cost of $ 6,235 per Bitcoin. At a revenue potential of $ 950 million, Marathon is also positioned to deliver gross margin of $ 800 million.
Clearly, the growth outlook is robust. Also, if Marathon can achieve a hashing capacity of 23.3EH / s by early 2023, the annualized revenue potential is likely to be $ 1.5 to $ 1.6 billion.
With strong revenue and cash flow growth coming, MARA stock looks attractive.
However, it seems strange that MARA stock trades at a forward P / E of less than 10. In particular, with multi-fold growth (likely) in revenue and cash flows. I believe that there are two reasons for depressed valuations.
First, Bitcoin has struggled to trade above $ 40,000. Once the cryptocurrency surges, Marathon stock is likely to follow.
Second, Marathon has been relatively slow in miner deployment. In December 2021, the company had a capacity of 3.5EH / s. In February 2022, the company increased capacity to 3.8EH / s. The monthly growth in capacity has been sluggish. The markets are taking the guidance of June 2022 (13.3EH / s capacity) with a pinch of salt.
However, Marathon has pointed out that “after successfully breaking the mold on deploying behind the meter at scale, deployments are expected to continue to accelerate throughout the rest of 2022.”
The markets will watch the March 2022 numbers. If there is significant acceleration in the hashing capacity, the stock is likely to rally. On the other hand, the markets seem to have discounted the slow capacity addition. The market reaction on the downside is likely to be capped considering current valuations.
Another point to note is that the company’s digital assets will swell significantly in the next 12-24 months. The company can hold these assets in the balance sheet for value appreciation. Additionally, these assets can be sold opportunistically for pursuing the next leg of expansion.
If there is one reason to be disappointed with Marathon, it’s the pace of deployment of miners. Once that accelerates, the stock seems to be positioned for meaningful upside.
Also, considering the company’s financial flexibility, there is ample scope for growth and diversification. Hive Blockchain (HIVE) is a good example. The company is in Bitcoin and Ethereum mining. Additionally, the company has strategic stake in decentralized finance and NFTs.
Overall, Marathon stock is attractive at current valuations. The financial risk is low. The only concern is execution risk. That too, slow execution than no growth. Importantly, this risk is largely discounted in current valuations.
Marathon was also paying a low cost of $ 0.042 / kWh for electricity. The rise in energy price in the recent past will imply higher cost in the coming quarters. That’s likely to be offset by a possible increase in Bitcoin price.