Marathon Digital: Watch below if Bitcoin goes down (NASDAQ: MARA)

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Olemedia

Bitcoin (BTC-USD) has been an absolute rocket ship this year. This, despite a fairly significant consolidation that has been underway since mid-April. Of course, this type of action drives a number of actions, including those that mine Bitcoin for a living.

One such name is Marathon Digital (NASDAQ:MARA), which has also grown tremendously this year, but has been stalled since mid-April. Last time I visited Marathon, I placed a buy rating on the stock as there was a bullish pattern identified in the chart. This setup was eventually invalidated and the stock ended up going down a lot. That’s why we use saves, and it’s a reminder that all we can do is try to put the odds in our favor.

Today I am on the fence. The stock has been in a very tight range since mid-April, which – uncoincidentally – began when Bitcoin began to consolidate. I think Marathon looks good, but I avoid taking a stand until he comes out of the range.

Big Consolidations Beget Big Moves

Consolidation for Marathon is now almost two months old, and you can see it has been extremely tight. The range is around $8.50 to $10.75, and we find the stock to the bottom of that range after Monday’s action.

Stock charts

Although this chart is one of blatant indecision, I will say that the PPO has reset to the middle line and the 14-day RSI remains above 40, bouncing every time we see this number. These are bullish market behaviors, so if I lean one way, it’s cautiously bullish.

Stocks related to Bitcoin and Bitcoin often go through boom and bust cycles, and I expect the exit from this consolidation range to be massive. This would be true only from the long consolidation, but this stock also has about a quarter of the short float as well. This will exacerbate the next move, whether it’s up or down, so buckle up if you have a position.

The bottom panel shows Marathon’s stock price against Bitcoin, which you can see going through its own boom and bust cycles. Marathon lost about 74% of its value against Bitcoin late last year, but has gained 75% (from a very low base) so far in 2023. This means investors are paying more today for Marathon Bitcoin than they did in January. I still think the stock looks cheap compared to Bitcoin, but that’s one more thing to watch. All in all, I’m cautiously optimistic about the next move.

Things get a little trickier when looking at the coin itself, however.

Stock charts

Bitcoin is putting in a pretty ugly descending triangle, and momentum indicators are unequivocally weak. There is a critical area of ​​support just above $25,000, where we currently are. If that falls to the downside, watch below as we could see a rapid test of $21,000 shortly. If that happens, everything I said about rallying Marathon out of its consolidation is null and void. If Bitcoin goes down, simply exit Marathon or any other Bitcoin-related item you own.

It looks pretty disastrous, and that’s because I see this board as a big risk. To be clear, we don’t have a breakdown yet, but if we do, all bets are off.

To counter this, we can see silver turning higher towards Bitcoin this year below, along with the relative performance of the coin against the S&P 500 and Nasdaq.

Stock charts

This outperformance changed in April when Bitcoin topped and it has underperformed sharply ever since. But it happens all the time, and time will tell if it’s a consolidation ahead of another upside or the start of another bear market in the OG alt currency.

Marathon is in trouble

Marathon has seen its share price completely destroyed over the past couple of years, but it’s for good reason. The company was basically printing money back when Bitcoin was hitting all-time highs, but it’s a far cry from that today.

Company Website

Bitcoin production looks great and capacity continues to fly. However, volume is only one piece of the puzzle. The second element, and probably the most critical, concerns the margins.

For example, in the first quarter, bitcoin production soared 74%, but revenue was actually down year over year due to bitcoin prices. Below we have the gross profit and gross margins for the last twelve months to illustrate the criticality of the problem.

ACTUALLY

Gross margin was 107% in the four quarters ending March 2022, but this time came in at 20%. Margins have fallen off a cliff, and only massively higher Bitcoin prices can save them.

The company needs higher prices to more easily fund its operating costs, but it also holds 3.1,000 unrestricted coins on its balance sheet, or about $80 million at today’s prices. This is why what happens to the Bitcoin chart we looked at is so critical for Marathon; it’s literally betting the proverbial farm on higher prices.

Estimates could finally be low enough

During the go-go days of Bitcoin’s all-time highs, estimates for Marathon and similar companies soared.

Looking for Alpha

We can see today that this has been rectified, and more. Earnings estimates are about 75% lower in most years, which is entirely justified. However, it seems that the pain has largely been absorbed by this point. The key is whether the coin itself sees a large price breakdown from its descending triangle; if that happens, there are probably more downsides to those estimates.

Another consideration for Marathon is its almost constant use of its common stock as a piggy bank.

ACTUALLY

The number of shares continues to fly, and that’s just bad for stockholders. There is literally nothing good here other than the fact that he avoided issuing more debt to fund operations. But when you see the number of shares increasing by amounts like what you see above, beware.

Speaking of debt, Marathon is working to reduce its reliance on leverage and has been selectively selling Bitcoin to do so.

ACTUALLY

The net debt of $610 million is still huge, so there is work to be done. But management at least understands there is a problem, so that’s a good start.

So what then?

If we take all of that and put it together, we get a mixed bag. The Marathon price chart in a vacuum looks slightly bullish. The problem is that society and stocks are entirely dependent on what bitcoin does, and right now I really fear that we are about to see a massive drop in the price of bitcoin. If that happens, the shorts will pile up on Marathon and it will almost certainly go much lower.

For what it’s worth, the title is modestly priced today on a price-to-sales basis, so it’s at least a fair price.

ACTUALLY

I would prefer to see it closer to 2X sales, but that will be fine. Unfortunately, this is another tick in the box for the “neutral” stance given the uncertainty surrounding Bitcoin’s price action.

The bottom line about Marathon is that I think you should wait. If we get an outage from the channel it’s in, make it short unless/until it gets back into the channel. If it bursts above, go long unless it falls back into the channel. There is simply too much risk with Bitcoin itself to take a position at this time, but this one is worth watching for the next big move.

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