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In the ever-evolving landscape of cryptocurrency, Riot Platforms, Inc. (NASDAQ:RIOT) has cemented it as a pivotal player, particularly in the realm of Bitcoin mining. At times, investors have used the stock’s performance as a litmus evaluate for the broader industry. As we delve into Riot’s financial and operational performance, especially in the third quarter of 2023, a complex picture of challenges and triumphs unfolds, offering investors a nuanced view of the mining industry begins to come together. On the one hand, we have the exciting prospect of Bitcoin ETFs, the recent crypto surge, and the halving providing tailwinds for the token over the medium term; on the other hand, we have the halving potentially posing challenges for miners (barring a major Bitcoin rally) and the risk of another spike in energy prices driving up production costs.
A Snapshot of Q3 2023: Mixed Revenue and Surprising Production Cost
Riot’s third quarter of 2023 painted a picture of robust growth with total revenues reaching $51.9 million, a noteworthy boost from $46.3 million in the same period last year. This growth trajectory, however, isn’t devoid of challenges.
The quarter witnessed an intriguing phenomenon – the average cost to mine Bitcoin was negative, at ($6141), a stark contrast to the previous year. This anomaly primarily stemmed from power curtailment credits, which significantly bolstered Riot’s revenue, adding $49.6 million in the quarter.
It is important to recall that investors will want the company to safeguard wins from their core business and not via credits but the memory of the challenges posed to mining companies will still be fresh in everyone’s memory, which will likely provoke investors to look on recent results with a more understanding approach.
Nevertheless, Riot did pull together a good report in October. A cornerstone of their operations is the deployment of 98,694 miners, contributing to a formidable hash rate of 10.9 EH/s. The mining efficiency is also spotlighted, with an average of approximately 12.0 Bitcoins mined per day, totaling 1,106 Bitcoins mined.
Riot’s core operation, Bitcoin mining, yielded 1106 Bitcoin during Q3 2023. This output, achieved amidst an increasing network difficulty, speaks volumes about the company’s operational efficiency and technological advancements. In the recent production update, we can see things are continuing to boost, with average daily production hitting 14.8 Bitcoin per day in October, which shows that the firm is ramping things up, but this is still less than the 16.4 over the same period last year. In other words, we are trending for monthly and quarterly improvements.
| Metric | October 2023 | September 2023 | October 2022 |
|---|---|---|---|
| Bitcoin Produced | 458 | 362 | 509 |
| Average Bitcoin Produced per Day | 14.8 | 12.1 | 16.4 |
| Bitcoin Held | 7,345 | 7,327 | 6,825 |
| Bitcoin Sold | 440 | 340 | 450 |
| Bitcoin Sales – Net Proceeds | $12.5 million | $9.0 million | $8.7 million |
| Average Net Price per Bitcoin Sold | $28,408 | $26,379 | $19,339 |
| Deployed Hash Rate | 11.7 EH/s | 10.9 EH/s | 6.9 EH/s |
| Deployed Miners | 106,674 | 98,694 | 65,516 |
As a low-cost Bitcoin (BTC-USD) producer, Riot Platforms touts a year-to-date (YTD) direct cost to produce one Bitcoin at $5,537 (this is distinct from the average cost above), which is significantly below the average market value of a Bitcoin. The company’s gross margin from Bitcoin mining stands tall at 79%, underscoring its recurring theme of operational efficiency despite market challenges. Additionally, the cost of power, a critical component in mining economics, is competitively priced at $0.017 per kWh.
Financially, Riot Platforms maintains a strong liquidity position with a cash balance of $290 million and holds 7,327 Bitcoins, valued at approximately $198 million.
Notably, the company has zero long-term debt, which is particularly noteworthy in an industry often characterized by heavy leverage.
Hash Rate Expansion: The Roadmap Ahead
Looking forward, Riot’s requirements are pretty clear – to ramp up its hash rate significantly. The target of reaching 12.5 exahash per second by the end of 2023 and 20.2 EH/s by mid-2024 underlines a commitment to growth and market dominance. These plans are bolstered by strategic decisions such as the agreement with MicroBT and the optimization of their miner fleet. Such steps not only signify expansion but also ponder an adaptive approach to technological advancements and efficiency enhancements.
The challenge with the miners and hash rate growth is how they’ll pay for it and the changing costs of production around the halvings.
In the past, miners have relied on secondary offerings to fund operations between crypto bull markets. In fact, Riot recently tapped the market in August.
The other factor is the halving. Halvings have the potential to destroy or greatly boost the Bitcoin Mining model. In the past, we have seen Bitcoin appreciate at a much higher rate than the loss of reward by halvings. This has lifted the industry. With the upcoming halving, there is a risk of a negative outcome coming to fruition, but Bitcoin’s recent proceed is improving that situation.
We will likely need to see a major improvement to lift miners to profitability, but it is important to note the correlation between these stocks and the token regardless of profitability in the past (as well as Riot’s relative performance).
Confronting Risks: A Reality of the Crypto World
Despite the promising aspects, Riot’s journey has its share of risks and uncertainties. The volatility of Bitcoin prices remains a perpetual concern, adding a layer of unpredictability to the company’s revenue streams. Operational threats, such as those associated with mining activities and data center management, also loom large. Furthermore, global economic conditions, regulatory shifts, and technological advancements pose potential challenges that Riot must steer, which is what creates the high-risk/high-reward opportunity. In fact, we can see earnings have been surprising to the downside recently.
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We can also see that the PS Ratios have somewhat stabilized, which, in effect, turns the stock into a proxy for Bitcoin – which historically hasn’t been a bad thing.
The Takeaway
As the company navigates the choppy waters of Bitcoin’s price volatility and the looming halving event, it demonstrates an unwavering commitment to growth and efficiency. The recent quarter’s performance, marked by strong revenue and robust mining output, offers a glimpse into Riot’s ability to adjust and thrive despite the industry’s inherent challenges. However, the reliance on power curtailment credits to accomplish negative mining costs may raise questions among discerning investors about the sustainability of such earnings.
The roadmap ahead for Riot is ambitious, with significant hash rate expansions on the horizon. Strategic partnerships and technological advancements are set to bolster the company’s position, but how Riot finances this growth amidst the halving’s cost pressures will be crucial. The company’s history of tapping into markets for funding and the potential impact of the halving on the Bitcoin mining model underscores the importance of strategic financial planning. With Bitcoin’s recent positive momentum, the prospects for Riot’s continued success seem hopeful, yet contingent on market dynamics.
While Riot Platforms Inc. showcases impressive operational and financial fortitude, the reality of risks in the crypto space cannot be ignored. Investors eyeing Riot must weigh the potential for high returns against the backdrop of Bitcoin’s volatility, operational risks, and broader economic factors. The company’s low debt stance and strong liquidity position serve as a buffer against some of these uncertainties, positioning Riot as an intriguing option for those willing to engage with the high-risk/high-reward nature of the cryptocurrency mining industry. I have rebuilt my position at an appropriate size for a speculative opportunity. I rate Riot as a buy.
