Marathon Digital: has the storm been overcome? (MARA)

[ad_1]

Adrian Vidal

I last covered Marathon Digital (NASDAQ:MARA) in late September when the company’s stock price was $10.77. The main takeaway from this article was both Marathon’s indebtedness and the company’s reliance on third parties would cause it to underperform its peers. While MARA’s performance since that coin has certainly not been the worst of the public miners over the past two quarters, some of the names I liked more than MARA did indeed perform better:

Data by YCharts

Over the past six months, we have seen Riot Platforms (RIOT) outperform to the point where it is now the industry leader by market capitalization. We have also seen a small degree of multiple expansion over the past two quarters for many of these names:

Data by YCharts

At the end of September, MARA was trading at 1.7x book value and has since doubled to more than 3x book value. But again, this is not unique to Marathon Digital, as almost all of the companies in the table above have seen their price to book roughly double several times over the past 6 months.

The Bitcoin Setup

For many of these companies, the fundamental setup is very different from just a few months ago. For example, the price of natural gas has come back down, which has helped put a temporary floor on mining profitability, even though the hash rate continues to hit new highs. Bitcoin (BTC-USD) itself benefits from a banking crisis narrative that saw the price of BTC surge from around $19,500 to over $29,000 in the space of around two weeks.

Daily BTC (TradingView)

There are also positive signs on the technical side. We are two months away from a 50 day golden cross on the 200 day moving average and both continue to rise. We are four weeks away from a 200 day test and hold and BTC is now trying to break through resistance that could see it break above $30,000 if this rally can continue. Positive signs can also be seen in some of Bitcoin’s valuation multiples.

Look into Bitcoin

Bitcoin’s Puell Multiple is now well above 1 after being well below 0.5 throughout the second half of 2022. In previous cycles, this type of activity in the Puell Multiple after deep dips below 0, 5 for an extended period has often indicated BTC the bottom is in place and the next bull cycle is not far behind. If history repeats itself, Marathon Digital is well positioned to take advantage.

March production and HODL stack

From a Bitcoin cash perspective alone, no public miner holds more BTC on balance sheet than Marathon and very few miners come close to MARA in terms of EH/s mining capacity. Riot is close at 10.5 PE/s in March. Only Core Scientific (OTCPK:CORZQ) has a larger mining operation, but that company is bankrupt. Crypto Winter has been tough on these companies and those that were over-leveraged have been executed. I suspected that Marathon Digital could also be a potential victim, but I’m less convinced if the BTC bottom is indeed present.

We received the March production numbers from the miners in the last few days and by my count we have eight miners who updated the numbers. So far, only two public miners have produced more BTC in March than in January and February: Marathon Digital and Cipher Mining (CIFR):

Monthly BTC production (company disclosures)

These gains were largely driven by strong PE/s increases for both companies. The MARA exploded from 9.5 to 11.5 and the CIFR increased more modestly from 5.2 to 5.7. Riot Platforms, CleanSpark (CLSK) and Bitfarms (BITF) also increased EH/s, but to a lesser extent in percentage terms. MARA not only grew production better than its peers last month, it also had one of the best months in terms of overall BTC Treasury growth; adding 74 BTC to the balance sheet:

February 2023 March 2023 Mo/Month % RIOT 7,058 7,072 14 0.2% MARA 11,392 11,466 74 0.7% HUT 9,242 9,133 -109 -1.2% BITF 405 435 30 7.4% CLSK 100 196 96 – 1% ARBK 6.5 – 1% ARBK 6.5 96.0% 427 -38 -8.2% Click to enlarge

Source: Company Statements

From my point of view, there is a clear difference between March and it’s Marathon Digital. It was the only company out of eight to see growth in production in January and HODL stack growth in February.

End of March sales (Marathon Digital)

For Marathon, the stack is down 6% from the end of the fourth quarter, but what remains is now fully cleared after the company paid off $50 million in debt.

We ended the quarter with approximately $124.9 million in unrestricted cash and cash equivalents and 11,466 bitcoins, which had a market value of approximately $326.5 million as of March 31.

These are positive signs from a company that still looks pretty gross on paper from a purely fundamental standpoint. However, the fundamentals look much less bad if Bitcoin continues to rally from here.

Risks

Like many other miners, Marathon’s business was hurt last year by a combination of margin squeeze, asset write-downs and third-party issues. Marathon lost a huge amount of money even after cutting stock-based compensation by more than $136 million from 2021 to 2022. If the price of Bitcoin increases, Marathon may eventually recoup its debt. But that’s still just a “if” and maybe a big one if the Fed keeps raising rates. Which is also another “if” but that’s a subject for another article.

MARA Common Shares Outstanding (Seeking Alpha)

Marathon had just under $125 million in cash at the end of March, much of which came from shareholder dilution to close the year. Common shares outstanding increased approximately 25% from Q3 to Q4 after growing from 116.8 million shares to 145.6 million common shares outstanding. A final risk to consider is the upcoming departure of the company’s chief financial officer, Hugh Gallagher, who will retire in May.

Summary

There are several BTC miners that have healthier balance sheets. But very few have the combination of the BTC stack and the production capacity of Marathon. Capacity that the company continues to increase until the end of 2023. If you are looking for a simple Bitcoin proxy bet that will increase when Bitcoin increases, MARA should do the trick and perhaps to a greater extent than others mining companies that lack the ability to significantly increase BTC holdings ahead of the halving.

I still do not personally own any MARA shares and do not plan to purchase any at this stage. But I think Marathon has shown encouraging signs in recent months. I will also say that I am a shareholder of Applied Digital (APLD). So I have indirect exposure to Marathon because it’s Applied’s biggest hosting customer. There is still a very large short position on this name. Although I don’t buy MARA rather than RIOT, I don’t see Marathon as a sale anymore.

[ad_2]