As the price of Bitcoin (CCC:BTC-USD) continues to climb, so does the price of Marathon Patent (NASDAQ:MARA) stock. The patent troll-turned-crypto miner has seen its shares soar more than 20-fold since November. But is this sustainable for MARA stock?
These gains have far outpaced even Bitcoin’s impressive run during the same period. As I wrote previously, this is understandable. With the costs of cryptocurrency mining largely fixed, a rise in the price of Bitcoin will produce an outsized increase in profits for the miner.
That’s assuming Marathon already has a substantial crypto mining operation. However, it doesn’t. Take a look at its financial results, and you’ll see the company has generated just $1.5 million in sales over the past 12 months.
Compare that to Marathon Patent’s current market capitalization (around $4.2 billion), and it’s clear things have gotten out of hand. Even with the proceeds of last month’s $250 million registered direct offering, and the company’s Bitcoin mining projections (more below), there’s no guarantee it’ll produce the results needed to justify today’s valuation.
With this uncertainty in mind, it makes little sense to buy in at today’s prices (around $45 per share).
MARA Stock: Perception Versus Reality
With the surging interest in crypto prices, scores of small companies have looked to exploit the situation. It’s similar to what we saw a few years back, during the last “Bitcoin boom.” Companies with no prior interest in the space suddenly started calling themselves “cryptocurrency companies.”
With stocks trading on major exchanges more accessible than Bitcoin itself, this hoodwinks many investors. And, with many buying on the headlines, instead of on fundamentals, shares in these high-flyers can reach unsustainable levels. That’s what it’s starting to look like with this situation.
Admittedly, unlike some of the other Bitcoin coattail riders out there, this early stage miner at least has laid out projections that (in theory) could justify its current stock price.
As seen from a Feb. 1 press release, Marathon has implied it’ll soon be highly profitable, once it deploys all of its mining hardware. If it can put all of its machines into operation, the company could produce up to 60 bitcoins per day. At current prices ($50,000 per BTC), that means $3 million per day in revenue.
With its operating costs at around $4,500 per Bitcoin mined, that could mean $2.73 million per day in gross profit. On an annual basis, that’s near $1 billion in gross profit. To some, numbers like this could help justify the company’s current $4 billion valuation. Yet, mining Bitcoin is far from being a “set it and forget” type of operation. It may sound like all Marathon Patent has to do is plug in its hardware, and wait for the money to roll in.
But, there’s no such thing as a free lunch. This aspiring miner will have to overcome substantial hurdles if it wants to live up to expectations.
Why This Aspiring Miner Could Fall Flat on Its Face
Based on the current price of BTC, it could be generating $1 billion per year, once it fully deploys its mining hardware. However, the aforementioned press release makes mining for crypto sound easier than it is in practice.
Namely, it downplays the possible negative impact from what’s known as the “difficulty rate.” What’s that? It’s a measurement of the computing power it takes to mine a Bitcoin block. Over time, difficulty rates have continued to rise. As of late, this rate of difficulty has slowed down. This may give credence to this company’s ambitious projections.
Yet, don’t expect a slowing difficulty rate to last for long, given new hardware will soon come online.
How could this hurt Marathon Patent? If the “difficulty rate” rises substantially, it’ll mine far less Bitcoin than previously projected. The stock is priced as if its operations will go off without a hitch. But, if hiccups arise, shares have substantial room to fall.
Bull Case Remains for Crypto—Just Not for Marathon Patent
To be clear, I’ve long been, and will continue to be, one of the biggest crypto bulls out there. But, the bull cases for crypto, and this stock, are not one and the same.
While on the surface it may seem current trends support higher prices for Marathon Patent, unfortunately that’s not the case. On paper it claims it could eventually produce 60 bitcoins per day. After expenses, that would mean nearly $1 billion per year in gross profits.
Yet, like I said above, mining for crypto is much more difficult in practice. With a high chance of this aspiring miner falling flat on its face, continue to avoid MARA stock.
On the date of publication, Matt McCall held a position in Bitcoin.
The InvestorPlace Research Staff member primarily responsible for this article held a position in Bitcoin.
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