Summary Marathon Digital Holdings is benefiting from the recent increase in bitcoin prices; however, Marathon shares face significant headwinds from BTC halving and the introduction of bitcoin ETFs. The company has acquired new data center sites to improve control over utilization and reduce operational costs. MARA plans to increase its hash rate and expand its capacity through 2025 to 50exahash/second. Marathon Digital Holdings ( MARA ) is finding itself in an interesting position with bitcoin having occurred in April, essentially doubling the cost for the same resulting bitcoin mined. This is coming at a time when bitcoin prices are returning to their high watermark last seen in October 2022. Much of this interest may be piggybacking on the newly minted bitcoin ETFs that entered the market in January 2024 shortly after the SEC approved the first bitcoin spot ETF. I believe that this factor will result in MARA no longer being considered as a bitcoin spot proxy, as investors can now own bitcoin spot through these ETFs. I believe the timing will play to Marathon's advantage, in which a higher bitcoin price can alleviate some of the pressure on growth and margins. I provide MARA shares a SELL recommendation with a price target of $16.69/share. To be clear, my thesis isn't aimed at the shortcomings of leadership. My investment thesis is solely based on the diminishing returns of the bitcoin mining complex and the tradeoff of holding mining companies as a bitcoin proxy vs. holding the spot ETFs. This last point directly translates to investors turning to bitcoin spot ETFs and turning away from miners that hold bitcoin. Operations Marathon's current business strategy is relatively straightforward, with some interesting opportunities coming into play. In FY23, Marathon acquired two new data center sites, one in Kearney, Nebraska, and one in Granbury, Texas, for $179mm. With their two new data center acquisitions, Marathon will have more control over utilization and be able to have some control over power management. As bitcoin is currently competing for compute power with AI adoption in data centers, I believe this will allow the firm more flexibility and provide them with the ability to control capacity and utilization. Management anticipates that controlling their own sites will help in reducing operational costs. This can be substantially beneficial as the firm can select which power source they utilize for the data center, which according to their FY23 earning call , is sourcing power from NextEra Energy ( NEE ) at the King Mountain site in Texas. Management discerned that bitcoin mining can also be utilized as a circular power source in which the firm is exploring the use of landfill methane and biofuels to power their bitcoin mining operations. Based on what management described, mining operations will utilize methane to power the mining operations, and in turn, the heat generated from the mining operations will be utilized for some low-grade industrial processes. Management also discerned that heat generated from mining can be used to heat commercial buildings and homes, suggesting that operating revenue may stretch beyond their current capacity. In terms of operating capacity, Marathon increased its hash rate beyond its FY23 target 23exahash/second to 24.7exahash/second and doubling its network's hash rate from 254exahash to 509exahash. Marathon also improved the efficiency of their fleet by 21% from 30.9joules/terahash to 24.5joules/terahash. These improvements should provide Marathon with a significant amount of cushion in anticipation of the bitcoin halving event. Despite these operational improvements, we cannot negate the fact that bitcoin halving will require the same amount of effort for half the result, resulting in higher costs for the same resulting block. Production of bitcoin also grew substantially from 4,144btc in 2022 to 12,852btc in 2023, a 3.10x improvement. The firm did face some challenges throughout the year as their King Mountain and Granbury operations averaged as low as 51% and 56% capacity, respectively, in August, before returning to 92% and 99% in December. Marathon sold a total of 9,482btc in FY23 to realize cash proceeds of $264mm. This represents only 74% of the bitcoin produced in 2023. The proceeds were used to cover operating expenses, including energy hosting and other operating expenses. The firm also raised $608mm through ATM equity sales and utilized the proceeds for growth capital and other corporate purposes. Management also elected to execute on $417mm convertible notes in exchange for $329mm in equity, reducing total debt by 56% and, accordingly, saving the firm $101mm in cash through the transaction. Management has been focused on bolstering the balance sheet and currently has nearly $1b in cash and bitcoin as of January 2024. As of FY23, Marathon held 15,126 unrestricted bitcoin on the balance sheet. Looking ahead to 2024, management is seeking to grow their hash rate by over 35% to approximately 35-37exahash/second. Management anticipates this rate to improve even further to 50exahash/second by 2025, nearly double the current capacity. This will primarily be driven by their machine orders in the pipeline through their partnership with Auradine, who will be designing custom chips for Marathon for their custom-built high-performance systems. I believe that this factor can be advantageous over the competition, as the best mining performance will require the best computing performance. Eluding back to the halving event, there may be some risk to margins as more computing power will be required to mine the same bitcoin block. Valuation & Shareholder Value Corporate Reports Looking at operations, Marathon generated $387mm in revenue for FY23, 58% of which was used to cover energy & hosting costs. The firm generated $420mm in aEBITDA, a significant improvement when compared to FY22, as the firm recognized $331.5mm in gains through their digital asset loan receivable. I believe valuing MARA shares will be equally tactical as it is based on valuation. The firm currently trades at a premium to its FY23 book value of its bitcoin holdings at 9.31x. The challenge in valuing the firm based on book value is that the value of bitcoin is too volatile, which an investor may be better off trading the stock based on technical analysis over fundamental analysis. Fred Thiel made the comment on their Q4'23 earnings call that he had to strike out the $55k on his script as bitcoin appreciated to around $60k. TradingView In terms of creating a valuation for the stock, I believe there are some operational implications to take into consideration when building a case, including cost of power, compute cost, and other operating expenses, bitcoin halving and the associated additional compute costs, and the price volatility in bitcoin. I believe that MARA will trade at a relatively similar pace to BTC; however, I do believe there will be some pullback in the company's valuation as these costs circulate into operations throughout 2024. MARA Financials On a comps basis, MARA is trading at a relative discount to its peers Riot Platforms ( RIOT ) and CleanSpark ( CLSK ). Corporate Reports I believe that despite the valuation comparison, the factors listed above must be taken into consideration before buying or selling MARA shares. I believe that holding bitcoin mining companies no longer have the purpose of proxy for holding bitcoin, as spot ETFs are now available across trading platforms. I believe this factor will play a large role in the valuation of the bitcoin mining companies on top of more challenging operating costs. Given these factors, I provide MARA a SELL recommendation with a price target of $16.69/share at 75% of their current valuation. Corporate Reports In terms of diminishing marginal returns, I believe MARA will experience a challenging eFY24 in reference to higher costs. Though I wouldn't value a growth tech firm based on EV/EBITDA, I believe that presenting their operations-based valuation presents the deeper challenges that I believe MARA faces in the coming year due to these higher costs. Corporate Reports On a tactical basis, MARA shares appear to be on an uptrend. I believe the big catalyst for realizing my bearish price target will be the halving event and the cost implications coming to light in the next earnings call. If you are seeking to build a short position in MARA shares, I believe waiting until the end of the bullish pricing cycle will be more optimal for the trader. Purchasing puts may also be a stronger strategy vs. shorting shares directly. According to Schwab, 18.65% of MARA shares are being held in short positions. Open interest for MARA puts is highest in the June 21, 2024 contract with 4,504 open contracts at a strike of $12/share. There is open interest trailing all the way down to a strike price of $1/share, suggesting investors are relatively bearish on MARA. On the opposite end of the trade on the same date, open interest for $30/share calls is exceedingly higher at 18,599 open contracts. Schwab Please use caution if choosing to buy or short shares in MARA, as the shares have a relatively high volatility level. TradingView Considering their technical chart, I believe that if MARA shares break through the bottom barrier, shares will decline to my $16.69/share price target. Using the Ripster EMA Clouds, MARA appears to be on a downward trend that may lead to shares breaking through the presented theoretical price floor. Diminishing Returns of the Bitcoin Halving Complex For those who are less familiar with bitcoin, the token halves every 4 years. The halving event is exactly as it sounds. This event essentially halves the rate at which new bitcoin can be minted. This means that the contributions for mining bitcoin are cut in half. The result of this is that miners will receive half of the reward for the same amount of computing power. In terms of operations, this will double the compute demand to receive the same reward and will lead to higher marginal costs, or diminishing returns. This will not impact the value of bitcoin that are actively held or traded. This may change the perception of investors who actively buy and sell bitcoin, however, as this event is seen as an increase in the scarcity of bitcoin. I do not believe it is prudent to assume history will repeat itself, as any investment. MARA Financials I believe that Marathon will face significant costs that will offset its increased operating footprint and will turn its EBITDA margin negative in eFY24. Mara: Bitcoin Halving Considering historical trends, MARA shares have performed negatively in response to the halving events. Tradeoff Of Holding Bitcoin ETF One of the bitcoin ETFs available is BlackRock's iShares Bitcoin Trust ( IBIT ) which is offered at a net expense ratio of 12bps. This offering eliminates any operational risk that may be involved with bitcoin miners and provides an investor with direct exposure to bitcoin without having to directly purchase bitcoin outright. Fidelity Wise Origin Bitcoin Fund ( FBTC ) is also a competitive offering as it has a 0% net expense ratio. According to Bitcoin ETF Fund Flows, fund flows have exceeded $52b, suggesting tremendous interest in the ETFs since becoming available to investors. Accordingly, it is too early to assess the stickiness of investors in the ETFs as the ETFs have only been available since the start of the year; however, judging by the direction of fund flows, investor interest appears to be gaining steam. Bitcoin ETF Fund Flows MARA shares responded negatively upon the approval of these ETFs and declined by roughly -31% before recovering. MARA: ETF Approval Date The benefit of owning the ETF over MARA is that the ETF eliminates any operational exposure. One of the risks to owning a bitcoin mining company is that roughly 9.5% of bitcoin is left to mine, as the nominal cap remains at 21mm coins. According to Blockchain Council, bitcoin mining operations should extend out to 2140. I believe that by this point, the cost to mine may be too great for the reward.
