I’m about as big of a cryptocurrency bull as you’ll find. I have been for years. One might think that in turn would make me bullish on Marathon Patent (NASDAQ:MARA) stock. After all, Marathon Patent has positioned itself to be the stock for crypto bulls. It has put in ever-more aggressive orders for Bitcoin mining machines. That includes a massive order announced late last month.
With Bitcoin sitting above $33,000 as I write this, those rigs should be highly valuable. Certainly, some investors think so.
MARA stock has absolutely soared. In fact, its gains have dramatically outpaced those of Bitcoin, which itself has had an impressive run.
But the problems become clear when an investor takes a closer look. Marathon Patent has a great story. Unfortunately, at the moment, that’s all that it has.
Leverage to Bitcoin
The point of owning a miner of anything — whether it’s gold, iron ore or Bitcoin — is to gain leverage to the price of what is being mined.
A simple example is instructive. Assume a gold mine can produce 100,000 ounces annually. It costs $10 million a year in operating expenses (corporate costs, management, etc.) to run the mine. It costs $800 per ounce (wages, fuel, etc.) to get the gold out of the ground.
At a gold price of $1,000 per ounce, the mine does reasonably well. It generates $100 million in annual revenue. Costs total $90 million ($10 million in operating expenses and $80 million in so-called cash costs). That leaves $10 million in pre-tax profit.
Now increase the gold price to $1,200. Revenue now is $120 million. Costs, however, remain the same. And so on the back of a 20% move in the gold price, pre-tax profits have tripled.
This admittedly simplistic example highlights the investment appeal of a miner — again, any kind of miner. If the underlying commodity (or cryptocurrency) rises in value, the value of the miner should rise at an even faster rate.
To be sure, the converse is true, which makes mining stocks volatile and often risky. (Other factors like regulation, labor issues or poor management can and do contribute as well.) But it should go without saying that investors skeptical of Bitcoin probably should steer clear of MARA stock anyway.
MARA Stock Soars
And so we’ve seen MARA post rallies that have dramatically outpaced that of Bitcoin itself.
As I write this, Bitcoin in dollars has rallied 268% over the past year. MARA is up a staggering 1,844%. Over the last three months, the underlying currency has spiked 158%; MARA’s returns are over 500%.
In theory, the outperformance of the stock makes some sense. Again, MARA is leveraged to the price of Bitcoin. Marathon Patent has agreements for fixed electricity costs at its Hardin, Montana mine. Operating expenses will rise with the price, but certainly not at the same rate. If Bitcoin’s price in dollars doubles, Marathon Patent’s expenses will increase at a far slower rate.
But that theoretical case doesn’t necessarily explain the vast divergence. Even Marathon itself has highlighted a pair of incredible spikes in its most recent investor presentation.
From July 17 to Aug. 17 of last year, MARA gained 313% on the back of a 34% climb in Bitcoin. From Nov. 20 to Dec. 22, MARA posted almost the same return (312%), while Bitcoin gained just 28%.
Those moves don’t look like good news. They look like investors flooding a stock and boosting it well beyond any reasonable valuation.
A Lot to Prove
Indeed, Marathon Patent took advantage of the December spike to sell $250 million of its stock. Chief executive officer Merrick Okamoto sold $12 million of his own stake around the same time.
Now, the equity offering is raising capital. And I won’t begrudge Okamoto for taking some money off the table. But it’s at least fair to ask why management isn’t quite as bullish about MARA stock as so many investors seem to be at the moment.
But that’s not the biggest problem. The biggest problem is that Marathon Patent hasn’t done anything yet. Its investor presentation highlights huge potential profit out in the future, but current results are piddling. Marathon generated less than $1 million in revenue in the third quarter. Its huge rig order won’t be delivered until the second half of this year at the earliest.
Meanwhile, the company’s profit projections include one significant disclaimer: the so-called “difficulty rate.” Marathon is saying, basically, that if the amount of Bitcoin it can mine holds steady, it will make a lot of money. But that’s not how Bitcoin works. The difficulty rate has gone up over time, and it will likely continue to do so.
If it does, Marathon’s profits aren’t nearly as big as its charts — showing potentially $50 million per month in gross profit — suggest. They’re likely not even close. And the big outperformance in MARA stock of late is not pricing in that outcome.
To be fair, this can work. But I’m far from convinced. This is a former “patent troll” (hence the corporate name) that pivoted to Bitcoin mining when its old business model flamed out. I’d like to see some evidence that the new one is working before I consider recommending MARA stock instead of Bitcoin itself.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.