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Blockchain and cryptocurrency are two major buzzwords in the investor world today. Once an asset class only invested in by aggressive millennials banking on a massive paradigm shift, more and more investors are now piling into this space.
Among the crypto-related investments aficionados are gravitating to for returns are crypto miners. One of the prominent names in this space is Riot Blockchain Inc. (RIOT).
Riot is one of the leading public Bitcoin mining companies in the United States, and has shown impressive success of late. Driven by rising Bitcoin prices, this miner posted strong second-quarter results in August, surpassing analyst estimates in terms of revenue and sales.
However, investing in cryptocurrency comes with a certain level of associated risk. I am neutral on the stock. (See RIOT stock charts on TipRanks)
Record Q2 Results
Riot Blockchain posted stunning second-quarter results. The company reported revenues of $31.5 million, blowing away the $1.9 million Riot reported in the same quarter last year. This represents a massive 1,540% jump in revenue.
The crypto miner’s net income for Q2 2021 stood at $0.22 per share, in comparison to a loss of $0.31 last year. Any company that moves into the black in terms of earnings is worth considering. Indeed, crypto enthusiasts are on board with Riot right now.
This bottom-line performance was driven by margins, which improved to 70% this past quarter. These margins dwarf the 25% margins reported the same time last year.
This was a huge win for Riot shareholders, and those bullish on this sector. Riot’s share price has reacted accordingly.
Given where the average price of Bitcoin stood last quarter (around $46,000), there’s plenty of upside potential for Riot, should Bitcoin prices remain elevated. That said, Riot looks to be in a solid financial position to weather any storms that may arise. The company reported total cash and Bitcoin of $195.4 million as of the end of last quarter.
Riot Files Automatic Shelf Registration Offering
Riot Blockchain has filed a prospectus with SEC, which enables the company to offer, sell, and issue up to $600 million of common stock. According to the prospectus, company shares can be issued or sold from time to time under an agreement with the sales agents of Riot.
Shares of RIOT stock traded lower following the announcement, as would be expected. In general, share issuances tend to be dilutive and negative for existing shareholders. Additionally, one might wonder why Riot would do such an offering, given the company’s existing cash and cash equivalents position.
However, this issuance could be spun in a bullish way, from a growth perspective. Should Riot use this capital to fund an aggressive expansion program, long-term investors could potentially benefit.
RIOT Stock Has Underperformed Crypto of Late
As mentioned, due to the recent issuance, and otherwise bearish sentiment in certain hyper-growth segments of the market, companies like Riot have not seen the enthusiasm you might expect.
Riot’s share price has moved substantially higher since the beginning of the year. That said, RIOT stock still remains more than 50% below its retail mania-fueled peak earlier this year.
With crypto prices taking off again, one would think that this stock would take off. However, RIOT stock actually dropped 9% in July, while Bitcoin prices increased.
This divergence suggests investors may be getting wary of Riot’s valuation. The company’s top- and bottom-line growth suggests some elevated multiple makes sense. However, the extent to which Riot can maintain this sky-high growth appears to be the question on many investors’ minds right now.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, Riot stock is a Strong Buy. Out of four analyst ratings, there are four Buy recommendations.
The average RIOT price target is $47.75, implying 57.2% upside potential.
Bottom Line
Cryptocurrency mining is a risky sector in which to invest. Investors who are diving into this sector need to be aware of the wild swings that might come. Needless to say, investing in Riot Blockchain requires a considerable risk appetite.
Interestingly, Riot has witnessed a 930% return, while Bitcoin has gained 354% in the past 52 weeks. So, the argument can be made that the upside with crypto miners exceeds that of the underlying cryptocurrency itself.
However, one must have a heavy stomach to handle the volatility that is likely to materialize over time.
Disclosure: At the time of publication, Chris MacDonald did not have a position in any of the securities mentioned in this article
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