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Sunday, February 5, 2023

How Should Investors Evaluate Marathon Patent Group?

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Marathon Patent Group (NASDAQ:MARA) hit a 52-week high of $5.25 on Aug. 6. The bitcoin miner filed a shelf registration to sell up to $100 million of MARA stock in the future.

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While it’s fallen back some since the announcement, it’s still much higher than it was in late July when it sold $6.9 million of its stock at 90 cents a share. It used the net proceeds of the offering for general corporate purposes, including buying additional bitcoin miners.

Around the same time as the capital raise, the company announced it had purchased an additional 700 next-generation M31S+ ASIC Miners from MicroBT. This Chinese tech company specializes in blockchain and artificial intelligence.

Including the previous equipment purchased, Marathon will have 2,060 miners operational by the end of August, with a total of 3,020 purchased for future use by the company.

“Upon delivery and installation of the 1,360 miners due to arrive in August, the company will have 2,060 Miners operational, producing 184 PH/s. As a result, the Company’s aggregate hashing power capacity would increase by 320% from the current level of 56 PH/s. Based on current Bitcoin prices, the company would expect to become cash flow positive,” the company’s July 29 press release stated.

Marathon expects the final 1,000 S-19 Pro Miners to be delivered in the fourth quarter. In September 2019, it paid $4.1 million to buy 6,000, S-9 Bitmain 13.5 TH/s Bitcoin Antminers. In October, the company said that it would have 7,200 miners in production by mid-December, increasing its production to 100 PH/s (Peta hash or one quadrillion hashes per second).

Interestingly, Marathon never hit 100 PH/s. The company’s press release that mentioned the 700 miners said that it had 56 PH/s as of July 29, 44% less than its October projection. Further, rather than the 7,200 miners in production, it’s supposed to have 2,060 in operation by the end of August, producing 184 PH/s.

That’s a 229% increase in capacity.

Is it just me, or does this all seem like a bit of sleight of hand? It’s as if the entire business is built upon quicksand.

This makes me wonder about Marathon as a viable business. I don’t understand how any sane investor can evaluate this opportunity.

Why Shouldn’t You Buy MARA Stock?

Marathon is paid in bitcoin (BTC) and ether (ETH) for the mining transactions it performs. Due to the fact, the number of bitcoins can’t exceed 21 million, the transactions it performs, theoretically, become more valuable over time.

According to the Bitcoin Clock, all 21 million bitcoins will be mined by 2140. Therefore, there are still 120 years for someone else to capture a big chunk of the market.

Unless I’m missing something, a cryptocurrency version of Barrick Gold (NYSE:GOLD) could swoop in with its billions of cash and permanently impair Marathon’s business.

However, let’s assume this doesn’t happen.

Chief executive officer Merrick Okamoto believes that with 2,060 miners operating at 184 PHs, the company will be cash-flow positive.

In the company’s quarter ended March 31, it had a cash flow of -$1.1 million on $592,487 of mining revenue. Its gross margin in the first quarter was -95.0%, a 21% improvement from its gross margin of -120.5% a year earlier.

Looking at its income statement for Q1 2020, the 157% increase in mining revenue is a step in the right direction.

That said, I have no idea whether the market capitalization of $116.9 million [based on 30.1 million shares outstanding] is overvalued, undervalued, or just about right.

According to Morningstar.com, it has 12-month trailing sales of $1.55 million or 5 cents a share. That works out to a price-to-sales ratio of 77.6, a ridiculous multiple for a company with less than $2 million in revenue.

Evaluating Its Potential

So, how should investors evaluate Marathon Patent Group stock? Quite honestly, I couldn’t tell you.

I happened to read a blurb from Coindesk contributor Zack Voell, who quoted Messari bitcoin analyst, Ryan Watkins.

“‘Spillover from a resurging interest in cryptocurrencies’ is one reason for recent gains in mining stocks, according to Ryan Watkins, a bitcoin analyst at Messari. ‘It’s natural for mining stocks to rise with cryptocurrencies.’”

Voell goes on to say the analyst belies investors have priced in a bull market for bitcoin, which ought to produce a massive surge in revenue for Marathon.

Honestly, unless you fully understand cryptocurrencies, I don’t think you have any business owning MARA stock.

I’ve been asked to write about a lot of speculative stocks in recent weeks. This one takes the cake.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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