For investors that believe the cryptocurrency market is a tad too volatile for their tastes, blockchain miners such as Riot Platforms (NASDAQ:RIOT) offer a compelling alternative. However, sector participants must also realize that the blockchain is still a business that presents its own risks. I am neutral on RIOT stock.
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RIOT Stock Has Been a Great Investment (So Far)
Just based on sheer performance stats, it’s obvious that RIOT stock has been a great investment. Since the beginning of this year, shares of the crypto miner gained almost 300%. However, the challenge now is that the underlying sector has struggled for traction. In turn, RIOT hasn’t looked so hot, falling by nearly 20% in the trailing five sessions.
Like it or not, that’s the promise and pitfall of RIOT stock and its ilk. Earlier this year, TipRanks reporter Michael Marcus covered H.C. Wainwright analyst Mike Colonnese’s take on the crypto-mining community. While acknowledging their relatively small operations, their ownership of large-scale server rigs helps power the complex transactions that ultimately result in the creation of reward coins and tokens.
Even better, improving mining economics – particularly driven by higher underlying crypto prices as well as moderating energy costs – should foster upgraded financial expectations. So far, this framework has proven quite accurate.
More recently, TipRanks reporter Vince Condarcuri noted in late June that shares of Marathon Digital Holdings (NASDAQ:MARA) – a competing blockchain miner – jumped higher thanks to the rise of Bitcoin (BTC-USD). When the stars align, few assets rise higher than mining investments like RIOT stock.
However, when they don’t align, circumstances can become dubious in a hurry. For instance, MARA stock is down 27% in the past month.
The Ethos of Crypto Clashes with Its Business Model
Study blockchain-centric content on the web, and it won’t take long to understand that for some advocates, the fervor is akin to a religious belief. Put another way, an ethos – generally defined as a call to integrate decentralized protocols in mainstream institutions – undergirds crypto sentiment. However, the challenge as it pertains to RIOT stock is that said sentiment clashes with the blockchain’s business model.
As Colonnese rightly pointed out, crypto prices play a massive role in the viability of a crypto-related enterprise. A great example is wallet service and platform Coinbase (NASDAQ:COIN). By juxtaposing its revenue with the price of the benchmark crypto, investors quickly realize that wherever crypto sentiment goes, so too does Coinbase sales.
However, for RIOT stock, another vulnerability exists — crypto miners losing their nerve and selling their holdings. Unlike a platform operator like Coinbase, which may benefit from both bulls and bears – so long as trading activity is occurring – blockchain miners must account for their own economic considerations.
In other words, the miners have proven that they won’t hold on for dear life (HODL). If they need to sell to recoup the costs associated with mining, they’ll do so. In fact, many recently have done just that, adding downward pressure on cryptos in addition to macro headwinds.
Financials Tell the Tale Again
Similar to Coinbase, Riot’s financial performance shines a spotlight on the crypto-business-dependency problem. Again, the subsegment’s viability depends on the broader trajectory of the virtual currency market.
In 2020, Riot posted revenue of $12.08 million. Not surprisingly, the company rang up sales of $213.24 million – an almost 18-fold increase – the next year as the crypto sector exploded higher. In 2022, Riot, to its credit, still managed to post sales of $259.17 million despite the downfall in decentralized assets. Nevertheless, the year-over-year revenue growth rate diminished sharply to 21.5%.
More recently, Riot printed sales of $49.74 million in the second quarter of 2023. However, this tally represented a decline of 32% year-over-year. As the data shows, when crypto sentiment fades, so too do crypto-related businesses.
Is RIOT Stock a Buy, According to Analysts?
Turning to Wall Street, RIOT stock has a Moderate Buy consensus rating based on eight Buys, zero Holds, and zero Sell ratings. The average RIOT stock price target is $20.19, implying 66.9% upside potential.
The Takeaway: RIOT Stock Practically Mirrors Cryptos (for Better or for Worse)
Fundamentally, a strong argument can be made that RIOT stock offers an alternative to wagering on cryptos directly. However, it comes with an added price. Investors must realize that crypto miners have business considerations they can’t ignore, and these considerations may run counter to the core ethos of ardent blockchain supporters.
