Marathon Digital Holdings (NASDAQ:MARA) has been making news lately. It just brought on a new CEO on April 26 and also announced its preliminary first-quarter earnings on April 5. Both of these are bullish signs for Marathon, a Bitcoin (CCC:BTC-USD) mining company, and for MARA stock. My view is that MARA stock is worth about 32% more, at $45.06 per share.
Both developments show that the company has turned a corner and is headed toward Bitcoin mining profitability. The company said it had produced 196 Bitcoins during the quarter. At today’s rate of around $55,000 per Bitcoin, the revenue works out to about $10.8 million for Q1.
It now appears that Marathon Digital has enough cash to run operations without converting its Bitcoin into dollars. For example, it has $212 million on its balance sheet.
As a result, the Bitcoin that the company mines will be kept on its balance sheet as long-term Bitcoin holdings. As of the end of the quarter, it had 5,134.2 Bitcoin on its balance sheet. Marathon Digital says that they were worth $301.9 million, as of March 31. At today’s rate, they are worth $282 million.
The point is that the company is profitable enough, on a cash flow basis, to accumulate all of its Bitcoin mining output.
Update and Forecast
Marathon also provided an update on its mining operations. It will install 8,200 new mining machines (“miners”) during Q2. Also, Marathon will have 16,900 new miners in Q3. In Q4 it expects to have 49,700 new miners working. In January 2022, it will install 15,200 new miners.
So you can see that each quarter, the number of miners put to work increases exponentially. The total number of miners will be 103,120 by the end of January 2022. I also highly suspect that well before Q1 2022, they will likely announce a new program of mining installations.
Since Marathon said it would have 103,120 miners by the end of January 2022, we can deduce the miners it now has. The table on the right shows these calculations. This also has very interesting implications for our forecast of its revenue one year from now.
For example, the table shows that the number of miners will be seven times its present size at the end of Q1. This implies, all things being equal (which they won’t be), revenue will be seven times higher. For one, the hash rate will likely get harder to produce Bitcoin. But, on the other hand, it seems highly likely that the Bitcoin price will rise.
But we’re also assuming the hash rate grows harder. Instead of revenue growing by 7 times, it will grow by 70% of that amount or 4.9 times. Let’s also assume that Bitcoin prices rise 50%. So the total revenue gain will be 7.35 times (i.e. 4.9 times 1.50).
Analysts covered by Seeking Alpha predict $11.3 million in revenue for Q1 2021. This implies that revenue in one year will be 7.35 times $11.3 million, or $83 million. That puts the company on a quarterly annual run rate of $332 million.
What This Means For MARA Stock
Marathon Digital has a market cap of $3.37 billion today, based on an estimated 98.8 million shares outstanding and a price of $34.12. This implies that its forward run-rate price-to-sales (P/S) multiple is 10.2 times (i.e., $3.37 billion / $332 million). Ten times sales is not that expensive compared to its peers.
For example, Riot Blockchain (NASDAQ:RIOT) trades for 16.75 P/S for 2021. Using 80% of that ratio, to be conservative, leaves the P/S multiple at 13.4 times. This is also appropriate since we will apply to multiple to Marathon’s 2022 run-rate revenue.
So if we multiply $332 million run-rate revenue by 13.4, this results in a target market value of $4.452 billion. This is 32% above Marathon’s $3.37 billion market value. Also, it implies that MARA stock is worth $45.02 (i.e., 32% over its current price of $34.12).
Therefore, based on the company’s forecasts, MARA stock is worth about one-third more, or $45.02 per share once all its mining equipment is installed over the next year. That is a good ROI for most investors.
On the date of publication, Mark R. Hake held a long position in Marathon Digital Holdings (MARA) and Bitcoin (BTC).