A Picks and Shovel Play For The Digital Revolution

If you’ve been around the block then you know there are several ways to get exposure to digital assets. 

For example, you can go on an exchange like Coinbase (COIN) and buy bitcoin or a slew of other alternative currencies. 

Now, if you don’t feel like opening a crypto account, you can buy into an ETF that gives you exposure, like the Grayscale Bitcoin Trust (GBTC). 

But there’s even another way to play the explosion in cryptocurrencies. We’re referring to “a picks and shovel play” like Marathon Digital (MARA), which mines and produces bitcoin. 

Marathon Digital is far and away the most popular play for traders looking for indirect exposure to Bitcoin prices.

Before Grayscale and Bitcoin futures hit the market, you had to actually invest in Bitcoin.

That didn’t work too well for funds with rules and compliance.

So, many chose to put their capital into Marathon Digital.

And their interest hasn’t waned.

It’s consistently the top blockchain-related stock searched by financial pros and retail investors, save for when one of the other companies has earnings, despite alternatives hitting the exchanges.

But is it worthy of an actual investment rather than a cousin to Bitcoin?

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Marathon Digital (MARA) Business

Marathon Digital (MARA) is in the business of mining bitcoin. In fact, MARA runs North America’s largest and most sustainable bitcoin operation.

The firm has over 35K miners installed and is holding nearly 9K bitcoin.  

MARA invests in miners. It does not invest in infrastructure. This strategy allows them to keep energy costs low, as well as gain access to top-tier mining hardware.

Furthermore, MARA’s main source of revenue comes from bitcoin mining.

MARA has nearly 10Xed its bitcoin mining from 2020 to 2021. And is showing no signs of slowing down. 

The company’s basic profitability is broken down as follows:

Naturally, higher Bitcoin prices help them while inflationary pressures on energy inputs hurt.

With Bitcoin holding at $40K-$50K for the last few months, Marathon has seen its margins compress as the cost of running its operations rose.

 Financials

From 2018 to 2020, MARA produced a total revenue of $7M. In 2021, the firm’s revenues exploded to $150M!

And while its operating margin is negative, it has been declining steadily over the last three years, moving from -241.5% in 2018 to -31.6% in 2021. 

MARA has a current ratio of 49.89. That means its assets are 49.89 times greater than its short-term liabilities. 

Moreover, MARA has a quick ratio of 45.32. That means its highly liquid assets are 45.32 times greater than its short-term liabilities. 

Yet, it’s tough to get behind a company that has negative operating cash flow. That means even after its investments in technology and mining, the company can’t turn a profit with Bitcoin at its current price.

That’s a problem.

Valuation

If MARA can execute its game plan then it could be off to the races. 

For example, its price/Cash flow (fwd) sits at 4.81, which is significantly less from the sector median of 18.57. 

But that’s not all. 

Its forward Enterprise Value/EBIT is 8.69, which is much less than the industry average of 16.03

Despite the massive growth MARA has seen over the last year, it’s still nowhere near profitable. In fact, it has a negative gross margin of 31%

Things need to change if it wants to be taken seriously from Wall Street’s top investors. 

Financial institutions own roughly 41% of the shares. Which isn’t awful, if you compare it to a company like Tesla (TSLA) which institutions own 42% of. 

And like Tesla, MARA has shown investors it can grow rapidly. Last year revenue grew by 3K percent. 

Our Opinion – 1/10

MARA is a pick and shovel play on digital assets. Of course, the businesses’ success will be highly dependent on the adaptation of bitcoin. 

While MARA could turn out to be a winner, there are just too many question marks about bitcoin mining and sustainability to recommend this stock. 

It just doesn’t make sense to buy into a company who’s entire fortune rests on the rise in Bitcoin prices.

If you want bitcoin exposure why not just buy the digital asset via coinbase, Paypal, or some other source. 

At a 1/10 we’re not saying this is a short. But if you think this is a good long-term investment, you should take a long walk off a short bridge.