*The Original Analysis with graphs and visuals can be found here*
$MARA – Marathon Digital Holdings Inc. Stock Analysis:
MARA has gone through the ringer over the past couple of weeks caused by a series of unfortunate events. Firstly, on November 10th, 2021, MARA reported their Q3 2021 earnings report in which they beat their earnings estimate, but missed on revenue, however with revenue rising 6,000% YoY (for Q3), surely MARA would go up right? Wrong. MARA dipped on this earnings (about 14%) which was objectively the least of investors concerns after the next couple of events to unfold. 5 days after their earnings, MARA announced that they were being investigated by the SEC for securities law violations. This news (combined with the news of a $500M debt offering) caused MARA to drop by 27%, which was by far the largest drop/worry for investors. Lastly, to top it all off, the next day MARA reported that they increased their debt offering to $650M (from $500M), causing the stock to dip another 8% to put the cherry on top of an awful week.
This article seeks to find whether MARA is a good buy after their -28% week, or if they are still overvalued and could continue falling.
MARA Company Overview:
Marathon Digital Holdings is a Bitcoin mining company that was founded in 2010 and headquartered in Las Vegas. As of Q3 2021, MARA had 25,272 Bitcoin miners installed and mining Bitcoin, and 4,000 additional miners being shipped and awaiting installment. Furthermore, MARA has purchase agreements with Bitmain to purchase over 100,000 more miners and install them by January 2022.
MARA Investment Information:
Beta (Volatility Relative to S&P 500 Benchmark):
MARA has a beta value of 4.65, which means that their monthly price movements are 4.65x (365%) more volatile than the price movements of the S&P 500. This high beta can be worrying to longer-term investors and portfolio builders as they may look at this metric, however, when your price action is as tied to Bitcoin as MARA’s is high volatility is a given. This high volatility is definitely something that caters more toward the retail investment community, and why MARA has become a frequently discussed “crypto stock” in the community.
Shares Outstanding Historical Growth:
MARA has increased their shares outstanding by a CAGR of 160% over the last 4 years. This is arguably the highest CAGR in shares outstanding that I have ever seen and is heavily influenced by their share offerings in 2020, which increased the shares outstanding by a factor of 7x within 1 year. However, since the Q1 2021 report, MARA has only increased their shares outstanding by approximately 4%. This desire to maintain their current level of shares outstanding can be exhibited through their recent offering, in which they financed using debt instead of equity (which they have not opted for historically). I think that MARA is going to severely decline their share offerings, and I believe that share dilution is not currently worrisome for MARA investors, however it should be kept in the back of your mind and paid attention to.
$650M Debt Offering:
As previously mentioned, MARA had a $650M debt offering on November 17th 2021, which played a major role in their 28% decline. However, was this reaction warranted? Or was it an overreaction? Let’s find out.
MARA announced that they would be issuing $650M worth of 1% convertible senior notes due December 1st, 2026. MARA was able to secure this funding by offering interest of 1% which is very low for a company that does not have a published S&P Credit Score. However, the big opportunity here lies in the convertibility of these notes. These notes will be convertible as early as June 1st, 2026, in which holders can convert their notes into 13.13 shares for every $1,000 worth of bonds that they hold. The math works out to roughly 1 share for every $76 they invested in notes. This was roughly the price of their stock before it dropped 28%. However, if there are large movements in their stock, MARA has the right (under certain circumstances) to change the conversion rate of these notes.
MARA intends to use the proceeds ofc this offering to acquire bitcoin and/or bitcoin mining machines. Based off of their previous purchases it is safe to assume that MARA will be using part of these proceeds to purchase ASIC Antminer S-19j Bitcoin miners (given that their big orders have been these models of miners historically). Given that the current price for one of these miners is $12,000, given current bitcoin price of $60,000 USD, each of these machines is expected to breakeven in 1 year (after housing and electricity each machine should yield $12,630/year (USD)). However, MARA has historically been able to obtain a 6% discount due to high volume orders, bringing their price per miner to approximately $11,250. In their recent Q3 2021 investor presentation they estimated the return on invested capital is 109% annually, which matches up with the figures I found. Considering this return on invested capital (when purchasing miners), this offering should be beneficial for investors in the long run. Especially if you load up at current prices or after this bull run is over.
ESG:
Bitcoin mining has been heavily criticized by the public, the media, and large public figures like Elon Musk for consuming large amounts of electricity, thereby polluting the environment. This is a problem that few miners have addressed, however, MARA has pledged to becoming 70% carbon neutral by Q1 2022, and 100% carbon neutral by Q1 2023.
They have not laid out a plan on how they intend to do this, and there is not one that I can find online, so time will tell. However, I believe this to be in their best interest to attract more institutional investors, and more ESG conscious retail investors as well.
Institutional Investors:
Marathon Digital has piqued the interest of many institutional investors as of late. Currently they have 10 institutional investors, with the likes of Vanguard, and Blackrock having large stakes (8.8%, and 5.8% respectively). Furthermore, in their Q3 institutional investors disclosure, they reported 8 of their 10 institutional holders increased their position sizes, notably Goldman Sachs increased their position size by over 600%, and Charles Schwab increased their position size by 188%. Furthermore, there were only 2 holders that decreased their position sizes, who were Northern Trust (decreased by 2.3%), and BlackRock (who decreased their position size by 2.1%).
HODL’ing:
Ever since the start of the bull run around January of 2021, MARA has been increasing the % of mined Bitcoin that they are holding. In January of 2021, MARA held 3.5% of the Bitcoins that they mined, however, as of October 2021, MARA is holding 35% of the Bitcoins that they mine. Currently, MARA is holding 7,453 Bitcoin which equates to roughly $450M USD of liquid Bitcoins.
Investors may have one of two reactions to this strategy.
Firstly, people who are long Bitcoin should like this strategy because they believe that the price of Bitcoin will keep increasing over time, and then more MARA holds, the better their ROI. These investors believe that holding Bitcoins will help make their balance sheet better over time, especially during future bull runs. This strategy is riskier.
Alternatively, people who are not as bullish on Bitcoin will probably not like this strategy and opt-out for another mining company if they choose to have exposure to crypto in general. This is due to the fact that selling your mined Bitcoins right after mining them averages the price over time, which is safer for the company and brings them in more realized revenues.
Expansion and Growth Plans:
Between now and mid-2022, MARA plans to have all of their 133,000 ordered miners deployed and running, which should increase their generating capacity by almost 400%. I do not believe that this includes the miners that are going to be purchased as a result of their debt offering, however it is unclear, and I am hoping that they will announce more details on where they spent the proceeds of this debt offering soon. MARA plans to get all of these miners up and running by mid-2022, as they are going to start to charter their own flights to ensure that they can receive these miners in a timely manner. Furthermore, I believe that MARA has already reached an agreement with a facility to enable them to run these additional 100,000 miners for ($0.50/miner per day) $18.25M/year. However, given their current profitability (which factors in the current price of Bitcoin) these miners should drive in $1.26B in revenue/year.
Investment Valuation:
The only way in which I was able to value MARA was through a comparable companies analysis. This is due to the fact that MARA is not yet profitable, and they do not offer a dividend.
P/B Ratio:
By comparing MARA’s P/B ratio to that of their competitors, I found their fair value to be $45/share, which would imply a price reduction of 18%.
EV/Assets Multiple:
By comparing MARA’s EV/Assets multiple to that of their public competition, I found MARA’s fair value to be $38.50/share, which implies a downside risk of 30%.
D/E Ratio:
Lastly, by comparing MARA’s D/E ratio, I found their fair value to be $820/share, which implies an increase of 1400%.
Final Valuation:
As you can probably tell, MARA’s comparable ratios and multiples are vastly different from each other, which makes it difficult to value them. In order to value MARA, I decided to take a weighted average result of the 3 comparable metrics, giving weights of 45%, 45%, and 5% to the P/B, EV/Assets, and D/E Ratios respectively. By doing this I was able to arrive at a valuation of $80.58/share, which implies a 47.4% upside.
Overall Thoughts:
I think that MARA is overvalued relative to their peers in the industry, as the only reason for their comparable valuation of $80/share is due to the D/E ration implying a 1400% gain. However, personally I am bullish on the short-term prospect of Bitcoin, which MARA will give me exposure to. Furthermore, I would be looking to slowly accumulate more MARA after this bull run is over to get in at a low price and hold for the next 4 years until the next halving and bull run.
No comments:
Post a Comment