Summary Marathon's stock has dropped significantly despite the rising price of Bitcoin, indicating external factors affecting investor sentiment. The company's profitability remains a concern, with operating losses and dilution of shareholder stakes remaining the norm. Management's defensive position and potential increasing Bitcoin sales suggest a lack of bullishness on Bitcoin in the near term. Intro We wrote about Marathon Digital Holdings, Inc. (MARA) in May of this year when we expected more upside gains after announcing the company's Q1 earnings. Operational hash/rate growth as well as searing top-line growth were the main precursors for the buying volume gains we were witnessing in Marathon at the time. Although Marathon posted a further sequential loss in the first quarter, GAAP EPS earnings of $0.05 per share in Q1 beat consensus by $0.04 per share thus confirming the momentum we witnessed after the announcement. As a result, shares rallied almost $9 a share from our May commentary up to a July top of north of $19 a share. Since then though, the digital asset miner has given away all of its gains (and some more) as the stock currently resides just north of the $9 mark. Suffice it to say, this is a worrying sign given the price of Bitcoin is up close to 20% over the same timeframe (July 13th to November 14th, 2023). Given the large discrepancy between the performance of Bitcoin & the performance of Marathon over the mentioned period, one must think that investors are not merely looking at the company here but external factors. Fear for example could be forming due to the bitcoin halving event due next year or how the launch of the new ETF may affect the mining complex going forward. Either way, given the sustained pattern of lower lows over the past 24 months compounded by a fresh intermediate death cross (crossing over of the stock's 10-week moving average below its 40-week counterpart), we believe MARA will trade back down below $7 a share over the near-term to first of all test that multi-year supporting trendline depicted below. Marathon Digital Intermediate Technical Chart (Stockcharts.com) Sustained Lack of Profitability Forget the reported net income number of $64.1 million as this number came about as the result of a one-time gain associated with how $80+ million of debt was written off by diluting the float once more. A more accurate picture of Marathon's current profitability is its operating profit (-$15.6 million in Q3 ) and here we saw no real gains in the quarter despite sequential top-line growth of close to 20% in Q3. Suffice it to say, record Bitcoin production & growing margins mean little if shareholders' stakes are going to continue to be diluted going forward. Management tried to dress up the transaction stating that it was needed for risk-management purposes especially ahead of the halving event next year. While debt reduction on the one hand may help with forward-looking profitability (due to less interest expense), more money is also being taken out of the hands of shareholders with the hedging strategies management has begun to employ on the company's bitcoin holdings. Hedging acts like insurance in that it protects against volatility whilst also keeping upside potential intact. Irrespective of how Bitcoin trades going forward, shareholders will end up paying which is another worry if these hedging strategies continue over time on higher bitcoin holdings. Management Not Bullish On Bitcoin Over The Near Term A valid point concerning the recent convertible debt transaction was why didn't management buy bitcoin as opposed to buying back debt. Being bullish on Bitcoin, one would have thought management could have increased their Bitcoin holdings which after all is the long-term strategy of Marathon. However, the fact that management (with now a more liquid balance sheet) is talking about potentially picking up depressed assets (after the halving) means the company is taking a defensive position at least over the near term. Whether this is prudent or not (in terms of preparing for a potential bear market), it is all how the market prices in this sentiment going forward. Although liquid cash is always useful in a cash crunch, it is the company's assets that essentially grow the company . This may mean over the near that we will see further Bitcoin sales (2300 Bitcoin sold in Q3) not only to cover ongoing operating expenses but also to take some risk off the table before the halving next year. Suffice it to say, given the company's ongoing complexities and how sustained sales growth has not been impacting the bottom line thus far, there may be some validity in what consensus is predicting where it believes significant earnings growth (EPS of $3 a share) may not materialize until fiscal 2027. Conclusion To sum up, although sales keep on increasing in Marathon with exhashes hitting 23 by August of this year, shares failed to gain traction post the announcement of the company's Q3 earnings. It is fair to say that more stock dilution would not have gone down well with current shareholders which is why the company's growth curve (63%+ sales growth year over year) needs to be taken with a grain of salt. The float now stands above 220 million shares. We look forward to continued coverage.
