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An acquaintance of mine requested for my opinion on Riot Platforms (NASDAQ:RIOT), an organization whose main operation is mining Bitcoin (BTC-USD) on the market. I’ve prevented dabbling in cryptocurrencies and something associated to it to date. Briefly, I’ve but to see the enchantment to an investor with a long-term horizon. One of many benefits of proudly owning a enterprise as an alternative of the crypto itself, nevertheless, is {that a} enterprise has the potential for money move and adaptableness. This implies it offers extra room for security of principal and for the impact of compounding over time.
In Riot, I see a enterprise that lacks these regular benefits, and I’ll break down the assorted causes for why I consider its shares are a SELL and unlikely to be price shopping for.
Operations
The corporate has three working segments: Bitcoin Mining, Knowledge Middle Processing, and Engineering.

2022 Type 10K
As we will see, Bitcoin Mining section is accountable for almost all of revenues. It’s additionally the section that enjoys the most effective gross margins. Knowledge Middle Internet hosting is at the moment shedding cash, whereas Engineering makes a modest gross revenue. YTD information for 2023 confirmed comparable tendencies.

Q3 2023 Type 10Q
The Mining section employs using “miners” to create Bitcoin, computer systems designed for such. As of Q3 2023, the corporate had over 98K miners employed for this goal and elevated that to about 113K by year-end. They at the moment host these miners at a facility in Rockdale, TX and are growing a second facility in Corsicana, TX for larger-scale manufacturing. For these unfamiliar with how Bitcoin is mined, the method requires having sufficient computing energy to extend their “hash price” which permits them to search out new crytographic hashes on the blockchain and permits them to “remedy a block.” Doing so earns them block rewards, which interprets into new Bitcoin for them to promote. The hope is that scaling this permits them to understand as a lot revenue as potential from this course of.

Rockdale Facility (riotplatforms.com)
The Knowledge Middle section is operated on the Rockdale facility, they usually acquire income from institutional-scale miners who use their amenities to deploy and function their very own miners.
The Engineering section entails the event of energy distribution tools and different merchandise that they apply vertically to their very own mannequin but additionally promote to clients within the personal and public sectors for a wide range of makes use of past crypto and mining.
Transient Historical past
The corporate, whereas a lot older, is successfully a younger enterprise, after it immediately shifted its focus from medical gadgets to blockchain in 2017, as famous right here on Looking for Alpha by Hindenburg on the time. Let’s see how the monetary outcomes have been since then, together with reported YTD 2023 information.

Writer’s show of 10K information
Revenues ballooned beginning in 2021, exhibiting a radical change for the corporate. What was the catalyst to this? Administration famous in its 2021 Type 10K:
The rise was as a consequence of greater Bitcoin values within the 2021 interval, averaging $45,744 per coin as in comparison with $11,461 per coin within the 2020 interval and a rise within the variety of miners deployed from 7,043 as of December 31, 2020 to 30,907 as of December 31, 2021
This roughly tracks with the motion of the worth of Bitcoin on the time, rising between 4x and 5x in market worth from 2020 ranges to 2021 ranges.

Looking for Alpha
Since then, it has declined, which lowered their Bitcoin Mining revenues, however complete revenues remained secure as they launched their newer segments. Regardless of that outwardly optimistic look, let’s evaluation their free money move for a similar interval.

Writer’s show of 10K/10Q information
Money flows have been constantly damaging. The money move assertion sheds extra mild on why that is.

2022 Type 10K
The desk above signifies that working money flows have usually been damaging, whereas capex stays substantial. 2023’s YTD information reveals this pattern has not modified.

Q3 2023 Type 10Q
To finance this with out taking over debt, the corporate has been closely diluting its shareholders to boost capital, elevating over $1.2 billion from 2020 – 2022.

2022 Type 10K
This has resulted in complete shares excellent rising by greater than an element of 10.

Looking for Alpha
Just lately, the corporate introduced the Dec. 2023 outcomes for his or her mining section. They reported a 9% decline in Bitcoin produced YoY however a rise in web proceeds of 147%, benefiting from latest will increase in Bitcoin’s worth. Nothing about this means to me that the decline in manufacturing is an indication of a much bigger pattern, however upcoming months will make that clearer.
A Look To the Future
Given these unappealing outcomes, it’s fascinating to see that, regardless of the dilution, the market cap of the corporate has truly tripled within the final yr.

Looking for Alpha
What sort of hopes are mirrored available in the market recently that makes traders extra optimistic concerning the enterprise?
Corsicana Facility
The Corsicana facility remains to be largely beneath improvement and is the place the corporate reveals a substantial amount of its ambition.

Corsicana Facility (riotplatforms.com)
The corporate expects Constructing A1 to be accomplished by the tip of Q1 2024, which suggests Corsicana can begin contributing to operations as the remainder of the positioning is developed additional. A more moderen, bigger website will permit it to scale its operations additional and hopefully at decrease prices, offering substantial new income.
Immersion-Cooling
Presumably, if you’re studying this, you’re on a pc. You’ve most likely observed that your laptop heats up once you run extra functions and that the fan inside turns into louder because it tries to flow into extra air to chill it down.
Immersion-cooling is an alternate technique wherein a pc is submerged in a non-conductive liquid that helps dissipate the warmth extra successfully, relatively than counting on a fan. Mixed with the fastened contracts they signal to comprise their electrical prices, it’s allowed them to mine Bitcoin at a value effectively beneath even its market lows.

Firm Presentation
Thus far it appears like the corporate is scaling and maturing efficiently, and perhaps the market is responding to those developments. But, I’ve headlined this firm as one thing that I don’t suppose will ever be a purchase. Let’s get into that.
The Hash Price Drawback
As I discussed earlier, the corporate continues to buy extra miners with the intention to rising its computing energy and thus elevate its hash price. The difficult half right here is that rising manufacturing and thus rising hash charges reduces the return of a miner. As Onkar Singh, writing for CoinTelegraph, explains:
The variety of miners within the community, mining problem and, in the end, miner profitability are all impacted by adjustments in hashing energy. As well as, the mining problem rises when extra miners be part of the community as a result of it takes extra guesses per second to unravel the advanced mathematical equation and get the block reward. Because of this, the hash price rises as the problem of the Bitcoin community does.
This perform says quite a bit concerning the monetary potential of the mining operations. The hash price is essentially influenced by how many individuals get into it, and at the moment Bitcoin is standard and in demand. Whereas usually an increase in Bitcoin’s market worth could be good for a corporation attempting to promote it, that is telling us that, even within the quick time period, it may well create a suggestions loop that reduces the return on funding for these miners.
To present you an thought of how a lot this performs into it, take a look at the expansion of the hash price since 2020:

Ycharts.com
It’s up from about 40 TH/s to over 600, a fifteen-fold enhance. Contemplating how a lot capex the corporate at the moment contributes to buying miners for his or her amenities, this frequently rising downside goes to maintain the necessity for capex excessive, as an alternative of permitting it to lower.
Halving
Now, lots of people are extra accustomed to the “halving” facet of Bitcoin. Simply in case some readers aren’t acquainted, I’ll quote Investopedia:
After the community mines 210,000 blocks—roughly each 4 years—the block reward given to Bitcoin miners for processing transactions is lower in half. This occasion is named halving as a result of it cuts the speed at which new Bitcoins are launched into circulation in half.
As they go on to say, rewards had been initially 50 Bitcoins per block. With three halvings, we are actually at 6.25. The following halving is anticipated to happen this yr, and can scale back the reward to three.125. Because of this the longer term potential return on these miners goes to be lower in half very quickly and that this may proceed to happen.
We’ve a hash price downside within the quick time period making a pricey arms race of Bitcoin miners, after which there’s the issue of halving that can scale back potential revenues within the long-term. These items should not accidents. Bitcoin is designed to retain worth and be inflation-proof.
Miners within the precise sense, those that dig up gold, silver, copper, or one other mineral, should not encumbered on this method. As lengthy the ores aren’t too deep underground and the focus is sweet sufficient, it’s economically possible to mine them, and scaling such an operation essentially will increase margins. These minerals have precise makes use of and features that maintain them in demand.
Most significantly, minerals don’t have a mathematical property constructed into them that makes them extra pricey, regardless of the miner does. Bitcoin does have this function, and I consider the long-term investor ought to be involved about this inherent strain this creates on working margins, particularly since Riot’s outcomes aren’t even optimistic but.
Rigid Enterprise Mannequin
The very last thing that actually seals it for me is that this how this super quantity they’re spending on capex for one thing that can have diminished returns over time is unlikely to be useful for anything. I’ll quote their Threat Elements from their 2022 Type 10K:
Subsequently, our Mining operations focus completely on mining Bitcoin, and our Mining income relies on the worth of Bitcoin we mine. Accordingly, if the worth of Bitcoin declines and fails to get better, for instance, due to the event and acceptance of competing blockchain platforms or applied sciences, together with competing cryptocurrencies which our miners might not be capable to mine, the income we generate from our mining operations will likewise decline. Furthermore, as a result of our miners use these extremely specialised ASIC chips, we might not be capable to efficiently repurpose them in a well timed method, if in any respect, if we determine to change to mining a distinct cryptocurrency (or to a different goal altogether) following a sustained decline in Bitcoin’s worth or if Bitcoin is changed by one other cryptocurrency not utilizing the SHA-256 algorithm.
I feel this can be a very explicit danger issue that ought to concern people as a result of not each firm will say this about itself. Pfizer didn’t know it could be making COVID vaccines, but it surely was capable of leverage its present property to make that occur. Hanes, identified for its socks and underwear, was capable of make medical masks on the market.
It might be one factor if Riot may opportunistically produce totally different cryptocurrencies with the identical infrastructure primarily based on the most effective return obtainable, however that doesn’t appear to be the case. The corporate doesn’t at the moment have optimistic money flows, is going through headwinds artificially positioned to guard Bitcoin from inflation, and the lots of of thousands and thousands of {dollars} spent on capex for these amenities and miners might not have any secondary use.
What occurred to this inventory when it had a enterprise mannequin that couldn’t adapt earlier than? I’ll simply present you one other chart.

Looking for Alpha
Latest worth fluctuations are barely even seen. Even within the lows of the Aughts, shares of this firm had been over $100, and it’s a lot decrease as we speak.
For all these causes, I can not give a valuation for this firm. Missing optimistic money flows, mixed with the long-term outlook, I doubt there’ll ever be earnings to worth.
What Will Make RIOT A Winner?
People trying to promote RIOT however who’re apprehensive that they could miss a chance ought to know that every part I mentioned will most likely not matter if the worth of Bitcoin takes off from the place it at the moment is and stays up. This is able to not solely elevate the margins for his or her mining section, however it could additionally permit them to set greater costs for the info heart section and doubtless make that worthwhile too, particularly since their electrical prices are largely fastened. Briefly, if the worth of Bitcoin rises sufficient, finally that might outweigh the opposite damaging forces that make the corporate’s money flows damaging. The earlier this happens, earlier than extra halvings, the higher.
The query you might want to take into account is: What’s going to make Bitcoin try this? What’s going to enhance demand to hike the worth? For instance, if China desires to urbanize extra, they must import extra iron to construct issues, and so the revenues for all iron miners go up. I actually don’t know of any explicit factor that might set off this for Bitcoin in an identical method, however I don’t rule out that it may occur.
Conclusion
Riot Platforms has labored diligently on growing a cost-efficient technique of mining Bitcoin at an enormous scale. But, these efforts might in the end show extra helpful to individuals who consider within the cryptocurrency as a philosophical venture than those that spend money on shares of the corporate. Riot has not generated optimistic money flows because the shift to Bitcoin mining in 2017, and the character of Bitcoin signifies that it’ll possible be tougher for them to be worthwhile over time.
I consider long-term traders ought to personal an organization that may organically generate money flows and whose enterprise fashions give them the adaptable traits to proceed succeeding. Neither of those appear to be the case for Riot. Meaning shareholders should both face continued dilution of their fairness or will finally get worn out. Due to this, I feel RIOT is a SELL, and so long as it’s within the enterprise of Bitcoin mining, I doubt it’s going to ever be a purchase.