Marathon Digital Holdings, Inc.

Moat: 1/5

Understandability: 3/5

Balance Sheet Health: 3/5

Marathon Digital Holdings, Inc. (MARA) is a digital asset technology company that focuses on mining Bitcoin, a cryptocurrency.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview and Industry Trends: Marathon Digital Holdings (MARA) is primarily a Bitcoin mining company. It focuses on mining bitcoin by operating facilities that use specialized computing equipment to solve complex cryptographic puzzles. The company generates revenue through bitcoin rewards it receives for its activities.

The cryptocurrency industry, especially Bitcoin, is volatile and subject to various factors:

Price Fluctuations: Bitcoin prices are notoriously volatile, which directly affects MARA’s revenue and profitability.
Regulatory Uncertainty: Regulatory changes in different jurisdictions can impact the legality and attractiveness of bitcoin mining operations.
Technological Advancement: The constant evolution of mining technology means that companies must continually upgrade their equipment or risk being priced out of the market. The rapid growth of ASIC mining hardware is key to understanding the profitability of the industry.
Competition: The industry is competitive, with many companies trying to maximize their share of Bitcoin rewards, and the competition increases the difficulty of mining the coins.
Energy Prices: Bitcoin mining requires significant amounts of electricity. Changes in energy prices and energy regulation can materially change profitability.
Bitcoin Halving: Bitcoin rewards are reduced by half every four years. This is referred to as the halving of block rewards, and will greatly reduce a miner’s profitability and the total bitcoin being added to the network.

What Makes Marathon Different:

MARA is one of the largest publicly traded Bitcoin miners in North America.
Its operations are primarily located in the US, and its has sought to grow internationally.
They also have some of the largest Bitcoin holdings among publicly traded miners.
Management is attempting to diversify into the Artificial Intelligence space.

Financial Analysis

Revenues: MARA’s revenues are derived from mining bitcoins and vary substantially with the price of Bitcoin.
Margins: The company’s gross margin is highly dependent on fluctuations in the price of Bitcoin as well as their hashing efficiency and price of electricity. Costs are mainly related to energy expenses, network fees, and depreciation of their equipment.
Volatility: The nature of mining bitcoin is that revenues and profits can be volatile and unpredictable, as it depends not only on the company, but on the global industry and price of Bitcoin.
Cash Flow: Cash from operations also varies wildly with the price of bitcoin and can fall significantly when mining difficulty increases.
Profitability: Operating profit is frequently negative, as has been reported in most of MARA’s latest earnings, as the company has to offset its costs. As bitcoin prices fall, profits also decrease.
Balance Sheet: The balance sheet has a low amount of liabilities, so its reasonably healthy in that front, but is also dependent on continued fundraising. The company has significant current and non-current assets, and a large amount of cash equivalents that allows them to maneuver through volatile bitcoin prices. The company’s book value is consistently lower than the market value, due to their operations mainly relying on intangible assets and bitcoin. This is a concern, given that if prices of Bitcoin do not rise enough to offset their book value, future values may lead to a significant loss.
Profitability: It also looks like even though the price of Bitcoin has recovered somewhat, the company is still unable to generate any significant profit, and as a result future earnings still remain uncertain.

Recent Concerns / Controversies

The company has faced scrutiny for its reliance on third-party custodians to hold its bitcoin.
The company has been heavily reliant on equity offerings and the sale of their bitcoin holdings to maintain a level of profitability.
In previous quarters, the company had suffered large impairment on their cryptocurrency holdings. This shows risks when managing the balance sheet and the need for proper risk management.
The company has stated they will be reducing their long-term liabilities and reducing their debt burden.
The company has been involved in various legal proceedings relating to their business.
The CFO has stepped down and the current CFO is serving on an interim basis.
There are some accounting policy changes that has affected the results.
Management does discuss various efforts into increasing efficiency and lowering costs to try and gain profitability, and these efforts have been emphasized in the earnings calls, however profitability hasn’t materialized yet.
Due to the volatility of crypto assets, it’s highly possible that a company may record losses due to the decline of prices.

Moat Assessment: MARA’s moat rating is 1/5. MARA operates in a commodity-like business with high competition and no differentiation among their operations. The company is dependent on technological advancements to maintain its hash rate and remain competitive, however, it cannot control or protect its technology from new entrants, and as other miners adopt these, profitability tends to decline. Additionally, the business is dependent on volatile bitcoin prices and requires constant maintenance and capital expenditure to keep pace with new entrants. It does not have any tangible pricing power.

Intangible Assets: While Marathon may hold some intellectual property over its methods of mining, these aren’t significant competitive advantages.
Switching Costs: Switching costs for Bitcoin mining is close to zero. Investors can move to other cryptocurrencies or different mining methods very easily.
Network Effects: Bitcoin has a large network effect but MARA does not benefit from it significantly.
Cost Advantages: MARA doesn’t seem to have an advantage over others in their operating structure, as they are highly reliant on energy usage, and any new entrant or competitor may have superior methods of hashing.

Business Resilience

The company’s resilience is low due to various factors:

High dependence on volatile bitcoin prices.
High exposure to industry regulations.
Competition can quickly eat into their profitability.
Reliance on further financing through debt or equity.

Understandability: MARA’s business model of bitcoin mining is relatively straightforward. However, understanding the financial implications and all the industry specific technical jargon can be complex. The effects of regulation, macroeconomics, technical advancements, and the inherent volatility of bitcoin is quite difficult to understand and may impact the company substantially. Due to these reasons, an understandability of 3/5 is assigned.

Balance Sheet Health: MARA’s balance sheet shows some signs of financial health. Debt level is low, and the company is able to generate consistent financing from equity sales. However, the company is dependent on bitcoin’s price, and any large drop in the cryptocurrency market can destabilize the business. The company has also had large write-offs of their investments, and it’s yet to be seen if the company can reach long term profitability, making a rating of 3/5 appropriate.