Riot Blockchain, Inc. is a cryptocurrency mining operation based in North America. The company primarily focuses on bitcoin mining however, it also adds Litecoin to its mix. As of December 31, 2020, it operated 7,043 miners. The company was formerly known as Bioptix, Inc. and changed its name to Riot Blockchain, Inc. in October 2017. Riot Blockchain, Inc. was incorporated in 2000 in the United States of America.
The Cryptocurrency boom in the market has been extremely volatile and profitable, causing investors both institutional and retail to dive headfirst into this excitement. However, just because Bitcoin, Etherium and other cryptocurrencies, might be viable investments that does not mean blockchain companies are a suitable investment. Through the analysis of the D/E ratio, Financials, EPS, Beta and etc. we will discuss whether or not RIOT is a suitable investment choice.
Let's begin with a simple analysis of Riot Blockchain's Financials
The Riot Blockchain currently operates with a Debt/Equity ratio of less than 2%.
This may give a positive signal however one must realize that debt can be quite beneficial to most organizations. There are many reasons why it is beneficial for a company to have a target debt/equity ratio. Firstly, Debt can help reduce companies' weighted average cost of capital. Because of the nature of Finance, through leverage, you can reduce your cost of equity, risk and increase your NI as interest is tax-deductible, which is fantastic for your ROE and extremely beneficial to your shareholders. Secondly, using debt you can continue holding or purchasing investments while using leverage to pay for operating activities. As it stands Riot was able to mine 1033 Bitcoin's by December 31, 2020. However, they sold 500 Bitcoins, this may be for many different reasons, but we can assume that they needed to sell this bitcoin to operate the business, which had total costs and expenses of $31,938,000 USD.
Now let us do a scenario analysis: The assumptions made here are that Riot sold their 500 bitcoins at the final price on December 31st (they didn't) and had 0 transaction fees on these sales (they didn't). This is the best-case scenario for Riot, and they still lose.
According to Yahoo Finance Bitcoin ended 2020 at $29,001.72 USD, so in our scenario, the sale of 500 BTC at $29001.72 USD would equate to a gain on sales of cryptocurrencies of $14,500,860.00. In reality, Riot Blockchain gained only $5,184,000 USD on the sale of 500 BTC which averages out at $10,368 USD per Bitcoin. Those 500 Bitcoins are worth currently $50,943.60 USD per bitcoin at 2021-04-24 6:04 PM EST in Toronto, Canada. Of course, it is impossible for Riot to not lose out on some bitcoin here, after all the point of a blockchain company is to mine bitcoin, and then sell it for a price higher than they acquired it for. The issue with this however is that Bitcoin is also a valuable long-term asset, and although extremely volatile, institutional investment companies like JP Morgan & Chase predict Bitcoin to reach extraordinary numbers as inflation of the USD grows. Therefore, mixing in debt to help pay for operating expenses, or even long-term fixed assets would be beneficial to Riot and their long-term strategy which has been a golden missed opportunity so far.
Currently, Riot's balance sheet shows they hold $223,382,000 USD in Cash or Cash Equivalent Assets, this is simply too much money to be holding. This could signal liquidity issues inside the firm, and since they don't have enough positive NPV projects to undertake, their cash is losing its value due to inflation.
Riot posted an EPS ratio of -$0.30 on December $31, 2020. Using the price of $38.48 (Closing on 2021-04-23) we obtain a P/E ratio of -128.26x. Remember that a negative P/E ratio just means that the company is operating at a loss so you can just use |128.26x|. This is an incredibly overvalued equity right now and it is clear that the market is looking at outside factors, rather than financial data, as Riot's financials (shown above) have not been efficiently managed, yet its share price has grown 2978.40% YTD (2021-03-24).
Now NASDAQ's analysis on Riot is actually quite positive, however because of the extreme volatility of BTC I advise cautiousness when looking at projected analysis in this industry.
Shareholders have been excessively diluted total shares outstanding has increased by almost 170% in the last year. (SimplyWallSt)
Return on Equity = -4.57%
Return on Assets = -4.52%
Dividend Yield = 0%
Beta: 4.67 (Nasdaq)
CEO: Jason Les has served as the CEO of Riot since February 2021 and graduated from U.C. Irvine in 2010 with a Bachelor of Science in Information and Computer Science. (RIOT) Jason has been within Riot for many years and has many years of experience within the Cryptocurrency space. Only time will tell if he will be successful as the CEO of Riot, one thing for certain is Jason has the experience necessary to handle this role.
With extreme volatility: Beta of 4.67 (NASDAQ), financials that are unappealing, debt/equity ratio that may be problematic in terms of opportunity costs, a p/e ratio that shows an incredibly overvalued stock, unappealing EPS ratios, inefficient investment and cash management. I would conclude that Riot Blockchain, is not a buy currently and to wait for changes in management strategies (new CEO), mergers and acquisitions (M&A of Whinestone), and capital restructuring. Due to the nature and volatility of Bitcoin, investing in a company that has not reduced its risk and has missed out on opportunities leads me to believe that Riot's share price is heading towards a downward trend very soon. However, the earnings report that will be released in early May could prove this analysis completely wrong, if earnings per share, ROE, revenue, all grow exponentially then Riot may be a fantastic long-term hold as well. I just believe that today, there are better investments that will maximize your returns.
Note: Political tax changes in the US can also impact Blockchain and Cryptocurrencies heavily. This becomes extremely complicated because of the difference in capital gains taxes vs corporate tax for Riot.
Note: Please be advised that this is an analysis done by a third-year Finance student who has much more to learn.