Marathon Digital: Risk Is To The Upside As Capacity Ramps

Summary Marathon Digital's stock has been highly volatile but appears undervalued as it accumulates more Bitcoin and scales mining capacity with low compute costs. Marathon's third-quarter report shows significant progress in mining capacity and lower computing costs, enhancing its competitive position and margins. Despite shareholder dilution to fund Bitcoin purchases, Marathon maintains a clean balance sheet with manageable long-term liabilities. Marathon's valuation is attractive relative to Bitcoin and its historical metrics, making it a compelling buy for patient investors seeking exposure to Bitcoin mining. Bitcoin miners have been through an unbelievably wild ride since the presidential election in the US, with many exploding higher only to see those gains quickly reversed. That’s been the case with Marathon Holdings (MARA), moving from $16 to $26 in the span of a few days, and finishing Monday’s session back at $18. The last time I covered the stock was back in June, and at the time, I was cautiously bullish. Shares have spiked and plummeted countless times since then, with it down about 11% from the price at the time of publication. Given the volatility of this stock, 11% over the course of five months isn’t much, but it’s down from my price in all fairness. The thing is, the allocation of capital in the Bitcoin-related stock space has gotten to the point where Marathon just looks cheap as it accumulates more and more Bitcoin. The stock will undoubtedly continue to be extremely volatile, but if you’re interested in owning a miner, I still think Marathon is worth a look. Choppiness galore I don’t particularly like charts that are super choppy, simply because they’re hard to trade. Seemingly random fluctuations in price are difficult to predict, which is why trends are better to follow, in my opinion. Marathon is the exact opposite of a trend. StockCharts Moving averages haven’t worked, and neither have support and resistance levels, for the most part. However, I think there are fundamental reasons for considering the Marathon, which I’ll detail below. Before we get to that, I will note the momentum indicators are showing that the bulls have a chance here to produce a bounce. The PPO is well into bullish territory, and the RSI is now testing 40 again, a place where it’s bounced significantly the past four times it’s been reached. We’ll see if that happens again, but given the way the momentum indicators look, and the fact that shares are down ~$8 in less than a week, I’d wager the odds of a bounce are higher than significant further selling. We shall see. This article, however, is not about the price chart, so let’s dig into the fundamentals for why I still think Marathon is worth a look on the long side. A quick review of the third quarter Marathon reported third quarter earnings a week ago, and it showed further progress in terms of building mining capacity, on an absolute but also relative basis. On that front, so far, so good. Investor presentation The company’s hashrate ended the quarter at 36.9 EH/s, nearly double what it was a year ago. It was over 40 at the end of October, and is expected to be ~50 by the end of December, per management's guidance. Of course, the halving made producing Bitcoin doubly as challenging, so there wasn’t a doubling of blocks produced in Q3. Still, Marathon is better off than it was a year ago on an absolute basis, and relatively. Available miner rewards were 4.8% in this year’s Q3 for Marathon, up sharply from 3.7% a year ago. In addition to boosting capacity quickly, Marathon is doing so at lower costs. Investor presentation It’s computing costs continue to decline, with significant progress in the past two quarters. So long as the company continues to build scale, we should see computing costs continue to decline, with higher margins the result. On this basis, I still like the fundamental picture here. We have a miner that is rapidly scaling, taking share from competitors, and doing so with lower costs. Apart from just mining, Marathon is attempting to be a leveraged Bitcoin play similar to MicroStrategy (MSTR), which was the OG Bitcoin Holder and shareholders have been rewarded over and over again. More on that below. Marathon now holds almost 27k Bitcoin, mining 2,070 during Q3 and buying three times that number for an average of $59.5k. In total, the company owns 20,266 Bitcoin it has mined for $42.8k each, and 6,481 coins it has purchased for an average of $60k each. That makes the company’s stash worth ~$2.5 billion against its market cap of $6.8 billion, or 2.7X its Bitcoin holdings. MicroStrategy owns 331k Bitcoin , worth about $30 billion, and has a market cap of $78 billion, or 2.6X its Bitcoin. There are obvious differences between the two, including the fact that Marathon is mining while MicroStrategy isn’t, and the latter employs enormous amounts of debt to fund its Bitcoin. It’s a leveraged Bitcoin fund at this point, with its software business absolutely meaningless in the context of $30 billion in Bitcoin holdings. Both models have their places, and I’m not comparing them directly, as they are quite different. But for some valuation context, it helps to understand how the chosen darling of Bitcoin stocks - MicroStrategy - is valued. Back to Marathon, one thing I’ve liked about the company’s operations is that it is not employing a huge amount of debt to finance operations. However, it continues to dilute shareholders. TIKR Common shares have exploded higher to 322M as of the end of the quarter, with further issuances used to buy Bitcoin. This strategy is fine as long as the shares issued are sufficiently cheap to make it a good use of capital. As long as Bitcoin goes higher, it’s hard to argue with, but dilution on this scale is something you must understand if you’re going to own the stock. Investor presentation The company’s balance sheet is clean with these share issuances, with long-term liabilities at just $665 million, which is quite manageable. Shareholder equity nearly tripled YoY, so again, it’s hard to argue with the strategy. Just know you’re likely to be diluted significantly over time, so the company can fund its Bitcoin purchases. Is it cheap enough? That’s the real question here, as Bitcoin is at an all-time high while Marathon shares are nowhere close. So what gives? Well, the valuation has plummeted by any measure, which means that if you were looking to get into Marathon, it’s difficult to see a better time to do so. Let’s start with price-to-tangible book value. Keep in mind, this is tangible book value, meaning it excludes things like goodwill; this is actual cash value of assets and liabilities. TIKR We’re at 2X TBV today, a ~40% discount to its three-year average, and a ~65% discount to the 2024 high valuation. Is that cheap enough? It certainly looks favorable to me from a risk/reward perspective, but you’ll have to be the judge for yourself. The final thing we’ll look at is Marathon’s price relative to Bitcoin itself, as it follows that if you’re a big holder of Bitcoin, your stock should move in tandem with the OG alt-currency. Below, I’ve plotted Bitcoin itself, along with the two lower panels showing Marathon’s share price against Bitcoin’s, and MicroStrategy’s price against Bitcoin for reference. StockCharts Since 2024 started, Marathon’s valuation relative to Bitcoin has fallen 66% . That means that the stock is 66% cheaper against its Bitcoin holdings than it was 11 months ago. MicroStrategy, by contrast, has seen is relative valuation nearly triple . This chart, perhaps better than any other, shows how capital is flowing in this sector. MicroStrategy is accumulating capital at an astonishing rate, with investors seemingly ignoring this explosion in valuation. The thesis here is that miners may start to attract some of that capital if/when the move in MicroStrategy cools. That stock is parabolic at this point, so capital will flow out at some point, and I think miners like Marathon will be beneficiaries. The bottom line here is that Marathon requires some patience here, but if you were looking to own a miner, it looks like a good choice today. The company’s capacity is ramping rapidly, it’s doing so with lower costs, and it owns a huge number of Bitcoin. Finally, the valuation is extremely attractive relative to Bitcoin’s price, as Marathon hasn’t participated in at all in this latest bull run. Its valuation is at the same point that we saw significant moves higher in the past; is this time different? I don’t think so, and I’m sticking with my buy rating on Marathon as a result.