Marathon Digital Stock: Acquisition Is The Name Of The Game (NASDAQ:MARA)

Introduction

Recently, we’ve conducted a comprehensive sector analysis on Bitcoin mining and found that the only miners with financially sustainable post-halving operations are Marathon Digital Holdings (NASDAQ:MARA), CleanSpark (CLSK), and Iris Energy (IREN) (Table 1). Our findings were justified as the market rewards these 3 miners disproportionally when compared to the broader sector (Figure 1), and for good reasons. Based on our sector report, we found evidence of an emerging systematic risk of a sector-wide consolidation in the Bitcoin mining sector. This risk highlighted 2 key characteristics required to strive after the coming halving event in April. That 2 characteristics are faster-than-network expansion and mining/business cost efficiency.

Our initial analysis showed that MARA possesses one of those characteristics. What we’re interested to find out is whether MARA falls into the “Slow and Steady” bucket, and under what circumstances can MARA’s valuation be justified. We may have briefly mentioned MARA in our sector report, but we have yet to analyze MARA in full. Therefore, this article represents our detailed and comprehensive analysis of MARA.

Table 1. Total Mining Cost (TMC) per BTC

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Source: Author

To What Extent Has MARA’s Upside Potential Been Priced In?

Being the biggest has its downside for investors, one of it is the efficiency of information where public-available information is already priced into the stock price. Some invests in MARA primarily for the size of its Bitcoin reserves, others invest because MARA is the biggest publicly traded miner. If you’re one of them, we hate being the ones to inform you that these 2 upside potential has been fully priced in.

MARA has a bull-case adjusted book value of $1.67bn (= $100mil cash + $742mil PP&E + $150mil prepaid + 15,741 BTC valued at $66,000 – $364 total liability) while trading at $6.1bn market cap, or 3.61x adjusted book value. This means that even though MARA has the biggest Bitcoin reserve, the market has priced this in with a 2.61x premium.

Table 2. Valuation Comp Based on Price to Adj Book Value ratio (PBR)

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Source: Author

Trading at higher PBR isn’t a problem if MARA can support such valuation with profitability. However, the market has already priced in about a $160,000 Bitcoin, which is not expected to achieve in the next 4 years according to the Bitcoin halving cycle. In short, there is no alpha to be made here as well.

$1.67bn out of the $6.1bn market cap is supported by net asset value (book value), the remaining $4.43bn “deficit” should be supported by profitability.

Firstly, MARA’s total mining cost (TMC) per BTC stands at $39,000 which will translate into $78,000 after halving. Secondly, MARA’s capacity is expected to reach 35 EH/s and 50 EH/s by 2024 and 2025, which translates into about 4.3% and 4.15% network share or about 7,000 and 6,800 Bitcoin annual production by the end of 2024 and 2025.

At $160,000 per Bitcoin and 2024 guidance (35 EH/s), MARA’s operation can be valued at $3.15bn at 5x earning multiples + $2.9bn adjusted book value, giving it a total of $6bn valuation; At $162,000 per Bitcoin and 2025 guidance (50 EH/s), MARA’s operation can be valued at $3.2bn at 5x earnings multiples + $2.86bn adjusted book value, giving it a total of $6bn valuation.

You might also be baffled by a forecasted decline in network share (4.8% current compared to 4.3% and 4.15% in 2024 and 2025 respectively). This is because MARA has only guided a 30% growth in 2024 and 42% growth in 2025, compared to the expected Bitcoin network growth of 48% annually.

Other assumptions:

• PE = 5 because we estimate a 5-year average useful life span of the equipments.
• Bitcoin network growth rate of 48% to 57% annually to reach

Based on our $66,000 average Bitcoin price between April 2024 and April 2025, we only expect MARA to breakeven. This means we can only fall back to its book value. Even then, it is hard for us to recommend buying into MARA at 3.61x adjusted book value. Sure, MARA could very well trade higher alongside Bitcoin, but investors are only playing its Beta or correlation to Bitcoin rather than seeking to find alpha. This is very dangerous as a Bitcoin crash (which we don’t expect) could rack in outsized losses. Furthermore, a sector consolidation could pull the entire sector just by negative sentiment.

Does MARA also fall in the “Declining Network Share” bucket?

MARA was growing strong until 2023Q3 where its network share has been increasingly steadily. But MARA started losing network share in 2023Q3 and in Jan 2024. This is a very worrying sign for MARA going into the halving event because Bitcoin production could potentially decrease by more than half despite doubling its capacity. This also explains why Bitcoin needs to trade at such a high price ($160,000) to compensate for the decrease in Bitcoin production. That’s why we can’t emphasize enough on the rate of expansion rather than the amount of expansion.

Table 3. MARA’s Network Share Changes (%)

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Source: Author; *Current; ** Guided

In addition to losing network share, MARA is also prone to frequent downtime that prevented it from operating at full capacity. Common problems include weather-related curtailment, and equipment failures. We’ve discussed mentioned this risk and its still a problem today. Therefore, our might still over-estimated MARA’s potential production.

What should MARA’s investment proposition be?

We think that those who want to invest in MARA shouldn’t look at its book value, mining capacity, or even mining profitability. Rather, investors should bet on MARA’s prospects if Bitcoin mining sector consolidate during this coming halving cycle. We have detailed why many Bitcoin miners are at high risk of operation infeasibility by focusing on their cost structure. Should that happen, mining difficulty will decline and boost the production of surviving Bitcoin miners, MARA being one of them.

Furthermore, what’s unique to MARA is that MARA is a prime candidate to consolidate the sector through aggressive acquisition. MARA has the largest war chest (more than 15,000 Bitcoins) among comps, 3x book value at $6bn market cap which implies ability to raise equity at good valuation (from company perspective), and sustainable Bitcoin mining operations to focus on expansion and acquisition instead of survival. In fact, this is what MARA has already started doing. In a series of acquisitions, MARA already “acquired” part of HUT (a miner that we’re very bearish on).

This particular ability is important because there are only so many strategic sites one can build. It is costly and time-consuming. So the ability to directly acquire competitors and strategic sites become critical to prevent losing network share. This coming halving cycle could provide MARA with the perfect opportunity to acquire these non-performing sites and unsustainable competitors cents on the dollar

Verdict

Here’s our verdict. The market has fully priced in MARA’s upside potential based on its future capacity and adjusted book value. But if investors insist, they should bet on MARA’s unique advantage in acquiring sites and competitors cents on the dollar should the sector consolidate just like in the previous Bitcoin 2021 bear market.

As for us, we’ll continue to hold Bitcoin and wait for our ideal entry price into CLSK. We previously deemed CLSK to be the only investible miner, though overvalued by our metric by just 30%. It’s still quite sad to see it spike the way it did before filling our orders.