Riot Platforms, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Riot Platforms is a Bitcoin mining company primarily engaged in scaling its mining capacity. The company’s operations are focused on Bitcoin production and data center infrastructure.

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

Riot Platforms, Inc. is a Bitcoin mining company that operates through two segments: Bitcoin Mining and Data Center Hosting. The Bitcoin Mining segment is the primary focus, where Riot uses specialized computing hardware to mine new Bitcoin, leveraging its access to low-cost energy in Texas. The Data Center Hosting segment provides co-location services to other Bitcoin mining companies, creating a revenue diversification stream, but it’s a very small portion of their total revenues.

Riot’s strategy is heavily reliant on scale and operational efficiency. The company seeks to achieve a high return on invested capital (ROIC) and achieve a low average cost of capital (WACC), which makes it difficult for competitors to keep up. They have also been actively working on expanding their hashrate, adding data centers, and taking advantage of the recent dips in the price of bitcoin to continue expanding their operations.

Industry Trends

  • The Bitcoin mining industry is very capital-intensive. Companies need specialized hardware to mine Bitcoin, and this infrastructure requires significant investment.
  • Energy costs are a substantial operational expense in the industry. The cost of electricity is one of the primary determinants of profitability.
  • The volatility of Bitcoin’s price plays a large part in the profitability. There are fluctuations that may have dramatic effects on revenue and the profitability of the business.
  • Regulation is evolving quickly. Governments worldwide are trying to regulate or restrict the cryptocurrency industry.
  • Competition is fierce and consolidation is increasingly happening. Many companies are entering the bitcoin mining market.
  • Public markets are very weary of cryptocurrency companies. Due to extreme volatility and financial uncertainty, some companies have had to delist from public markets to private trades.
  • The network difficulty is always increasing. In addition to the competition, this requires that you always have the highest tech equipment to keep up.

Revenues and Margins The company’s revenues come primarily from bitcoin mining, selling bitcoin to the open market or as a method of compensation. The company also generates revenue from hosting mining equipment for other bitcoin mining firms. Riot’s performance is inherently tied to the price and production of Bitcoin, which is volatile. Bitcoin Mining revenue for the three months ended March 31, 2024 was $73.5 million, compared to $38.7 million in the same period of 2023, driven by increase in hash rate deployed and bitcoin production, offset slightly by decreases in bitcoin prices. Data Center Hosting revenues were about $10.3 million for the same quarter, reflecting the value of the power contracts, infrastructure, and cooling capacity.

For the nine months ended September 30, 2023 and 2022, their gross profit was 45.1% and 60.3%, respectively. The company’s margins are largely dependent on energy costs and bitcoin pricing. The company had a volatile margin in recent quarters, reflecting some of the risks inherent in cryptocurrency mining businesses. Operating expenses for the three months ended September 30, 2024, totaled 115.6 million which were comprised of Bitcoin mining and engineering and data center expenses. The company is trying to keep operating expenses at a minimum while expanding their business.

Competitive Landscape

Riot operates in a highly competitive industry where scale, efficiency, and low operating costs are critical to success. The company’s primary competitors include other large-scale bitcoin mining companies such as Marathon Digital, Core Scientific, and Cipher Mining. Competitors such as TeraWulf, Iris Energy, and Bit Digital are growing into the industry. Other competitors such as Riot’s co-location customers could become a long-term risk.

What Makes Riot Different

Riot’s strategic focus on vertical integration sets it apart from other miners. The company is involved in every part of Bitcoin mining, from building and maintaining its mining facilities to developing and deploying its own proprietary software. The company is consistently working to lower the cost of electricity and improve mining efficiency, which gives a small boost to operations. Riot has secured various strategic partnerships, especially with energy providers, to ensure a stable, low-cost, and clean power supply. They are heavily focused on the long term and have a strong bias toward long-term value creation.

Financial Analysis

  • Revenue: Riot has had strong revenue growth due to its expansion in mining capacity, but this is extremely volatile due to bitcoin’s price volatility. The company’s revenue is primarily based on bitcoin production and sale.
  • Gross Margin: The gross margin is very volatile and based on the underlying price of bitcoin and energy prices.
  • Profitability: the company has had difficulty maintaining profitability, with fluctuating profits based on a volatile price of bitcoin.
  • Leverage: The company uses debt to fuel expansions, and this increases risks, but also allows for quicker expansion. They are working on reducing debt.
  • Capital Expenditure: The company has consistently used capital expenditure to improve their infrastructure and production capabilities.
  • Cash Position: The company has enough cash reserves, but this is not very high relative to their business size.

Overall, the financial performance of the business, and the company’s financial statement figures are very volatile and difficult to analyze. This is common for cryptocurrency mining companies.

Moat Assessment: 2/5

Riot’s moat is narrow and reliant on cost efficiencies, economies of scale, and partnerships for energy, specifically its long-term contracts for low-cost power.

  • Cost Advantages: The company’s ability to secure low-cost electricity contracts is a form of cost advantage, and it’s essential to have a low power cost to mine Bitcoin profitably. Although, most competitors in the space also leverage similar power contracts in their facilities.
  • Economies of scale: They are working to scale up their operations through higher hashrate and more facilities. This gives them an advantage when it comes to overall operating costs, but because the industry itself is becoming more fragmented, this might not be enough to get a good sustainable moat.
  • Network Effects: While not inherently in the business, the value of Riot’s bitcoin mining is reliant on Bitcoin’s network effect, which gives a little protection as long as Bitcoin’s network dominance is not challenged.
  • Brand: Riot has a little brand name recognition within crypto space, but nothing outside of it. This is not much of a moat, as they primarily deal with other businesses.
  • Intangible Assets: There are no significant forms of intangible assets, such as patents, brands, or regulatory licenses.

Overall, while the company has some forms of competitive advantages, it’s difficult to determine whether it can create long-term value for its shareholders. Hence, a rating of 2 out of 5 is justified.

Legitimate Risks

  • Bitcoin Price Volatility: A decline in the price of bitcoin can harm the profitability and revenue of the company because they are mainly reliant on bitcoin sales. This will lead to significant impairments in earnings.
  • Regulatory Hurdles: The ever-changing regulatory landscape for crypto assets presents significant risks. New regulations or restrictions could hamper the company’s operations.
  • Technological Innovation: Changes in mining algorithms or equipment could render the company’s existing infrastructure obsolete.
  • Competition: Increased competition from other mining companies could affect the company’s ability to earn high ROICs or scale operations.
  • Energy Price Risk: Power costs are a major concern and if the price of energy rises, this can hamper profitability significantly.
  • Macroeconomic Conditions: Financial downturns and a risk-off environment could push down the market and make it difficult to obtain cheap capital. Also, it makes bitcoin pricing more volatile.

Business Resilience Riot’s resilience to business challenges is debatable. Although it has a good strategy and has a solid understanding of economic moats, its profitability can be quickly wiped out by a massive crypto correction. The ability of its management to innovate and grow beyond just bitcoin mining is a key part of its resilience in the long run. The company seems to be well-prepared for industry downturns, and it has significant cash at hand to deal with any volatility. It also has been increasing its long-term power contracts to ensure low operating costs over the long term.

Understandability: 3/5 The business model of Riot is fairly simple to understand. They are focused on expanding capacity and mining Bitcoin while making a profit. However, a deep understanding requires understanding Bitcoin and its underlying ecosystem, financial metrics, and technical terminologies of the crypto industry, and all of this adds to some difficulty.

Balance Sheet Health: 3/5 Riot’s balance sheet has strengths and weaknesses. On the positive side they have decent current assets but they need to work to build up shareholder’s equity. Also, while they may have significant liquidity, the debt-to-equity ratio and the short term debt are high. Hence, a 3 rating is applicable.