Is Marathon Digital the Way to Play Crypto?

Bitcoin jumped over 250% during 2023.

Yet, crypto stocks like Marathon Digital (MARA) lagged well behind for months…that is, until it made a nearly 400% year-end rally.

Unsurprisingly, it lost a third of its value in the following weeks.

Financial pros began looking at the stock during that pullback, according to our TrackStar data, presumably for potential entry points.

However, we firmly believe crypto mining stocks are terrible investments. And you’re better off investing directly in the cryptocurrency instead.

But let us lay out our case and see if you agree.

Marathon Digital’s Business

Miners like Marathon Digital have pretty simple business models.

They own data centers that ‘mine’ bitcoins in exchange for bitcoins. Their goal is to keep the cost to run these data centers low relative to the bitcoins they produce.

Ergo, if bitcoin prices fall or energy prices rise, they do worse.

Marathon Digital attempts to keep its costs low by strategically locating its servers near low cost energy centers such as wind farms, hydroelectric dams, and oil fields.

Source: Marathon Digital Website

A lot of Bitcoin detractors say companies like Marathon Digital absorb energy to perform unnecessary tasks. Other cryptocurrencies like IOTA don’t require mining activities to function, making them more environmentally friendly.

Financials

Source: Stock Analysis

Although Marathon Digital’s revenues increased substantially, it doesn’t turn a profit.

In fact, it doesn’t even generate cash from operations.

During the last 12 months, the company blew $317 million, up from $177 million in 2022.

While Marathon only carries $326 million in debt, it continues to dilute shares to fund its operations.

The total shares outstanding climbed from 8.5 million in 2019 to 82 million in 2020 and now sits at 210 million.

Despite the hype, Marathon isn’t much more than a well-known penny stock.

Valuation

Source: Seeking Alpha

If the financials don’t turn you off, the valuations should.

Supposedly, Marathon Digital will generate a paper profit and positive cash flow next year. 

That relies on many assumptions, but is possible, given they probably aren’t increasing the size of operations much going forward.

Yet, we can look at other related cryptocurrency stocks from Riot (RIOT) to Hut 8 Mining (HUT), and see how unlikely it is for any crypto company to turn a profit.

Microstrategy (MSTR) and Coinbase (COIN) look promising. However, the former is a tech company that holds a large amount of Bitcoin while the latter is a crypto exchange, much different than miners.

Growth

Source: Seeking Alpha

Revenue growth largely depends on the price of Bitcoin and the increase in operations.

There’s no denying Marathon Digital can grow its revenues. But revenues don’t equal profits.

Profitability

Source: Seeking Alpha

Speaking of profits, its worth pointing out that none of these companies generated a positive EBIT margin last year.

However, Marathon Digital and Hut 8 did deliver positive EBITDA, which is why many believe they could generate positive cash flow next year.

Our Opinion 0/10

Again, we cannot stress enough that these companies are simply proxies to Bitcoin investing.

This isn’t like oil, where there’s no way to invest in the asset directly.

You can go out and buy Bitcoins with a digital wallet or even PayPal.

Any company that funds its ongoing operations through share dilution should come with a warning sign.

We’d stay clear of Marathon and look to invest in Bitcoin through other avenues.

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