The euphoria for cryptocurrency reached an intermediary peak in mid-November, lifting Marathon Digital (NASDAQ:MARA) stock to a high of $83.45. Momentum dropped quickly in the days that followed.
The company disclosed a Securities and Exchange subpoena on Nov. 15, and Marathon Digital dropped by more than 20%. MARA stock found support at its 50-day moving average last week as speculators bet on a rebound, but the stock is still trading at less than $55.
Why is the SEC asking questions about Marathon’s business?
MARA Stock Plunge Explained
On Nov. 15, Marathon, a widely followed Bitcoin (CCC:BTC-USD) miner, disclosed that it received a subpoena from the SEC. The SEC wants documents about its Hardin, Montana, data center facility. In the filing, the company wrote, “the SEC may be investigating whether or not there may have been any violations of the federal securities law.”
As Bitcoin prices rise, potentially heading to $80,000 or higher next, the hit on MARA stock could create a buying opportunity. The Federal Reserve continues to hold interest rates at unsustainable lows. The Fed tapering still results in trillions of debt purchases annually. To hold its store of value, people with available cash must buy Bitcoin. After the cryptocurrency’s rise, they get a positive return, in addition to protecting their asset value from the soaring inflation.
The Bureau of Labor Statistics posted the consumer price index increased to 6.2%.
Growth Opportunity
In the third quarter, Marathon posted revenue increasing by 76% sequentially (from Q2/2021) to $51.7 million. It rose by an impressive 6,091% from a year ago. The company produced 1,252 self-mined Bitcoin, up by 91% sequentially.
Non-GAAP net income was $85.4 million or 85 cents a share.
Chief Executive Officer Fred Thiel said it had 130,000 machines previously purchased that will come online between now and the middle of 2022. The CEO added, ”we believe the coming quarters will be transformative for Marathon, and we look forward to continuing to scale our operations.”
Investors may forecast an EPS of $4.23 next year, implying a forward price-earnings ratio in the low teens. At that low a multiple, Wall Street analysts are justifiably bullish. The price target ranges from $48 to $92, with an average of $68.33 (according to Tipranks).
Opportunity
Marathon has one of the most efficient mining operations. The CEO attributed its efficient operations to the non-GAAP income in the quarter. Investors should consider this mining firm over the competitors.
In addition, the company’s fair value of its investment fund rose. This raised its non-GAAP net income to 85 cents a share. Furthermore, the company ended the quarter with $32.9 million in cash and total liquidity of around $315.6 million.
Marathon will invest its cash on hand to fuel its growth. It has a history of strong financial performance. Keep an eye on its increasing hash rates. This rising efficiency gives the company a moat that competitors cannot challenge.
At the end of Q3, Marathon held around 7,536 Bitcoin. It says 4,813 are held in an investment fund while 2,723 were generated by the company’s operations. At a price of $60,000, those Bitcoin are worth $452.1 million.
Risks
When a company raises debt, it is never a positive event for the stock. Still, it enables the company to invest in growth, benefiting patient shareholders who buy and hold. On Nov. 15, the company announced a convertible senior notes offering. The notes are unsecured and will mature on Dec. 1, 2026. Upon conversion, shareholders will face some dilution.
Fortunately, Silvergate Bank issued a $100 million credit line to Marathon Digital before that. This allowed the miner to negotiate favorable terms for the debt offering.
Bitcoin prices could fall, hurting the value of Marathon’s holdings. Since crypto is highly volatile, it is an ongoing risk for investors should watch out for.
Your Takeaway
Investors should envision bitcoin as a vehicle and Marathon as an automobile manufacturer. It also acts as a holder of Bitcoins. Just as companies like MicroStrategy (NASDAQ:MSTR) and Tesla (NASDAQ:TSLA) hold 114,042 and 42,902 of the cryptocurrency, respectively, Marathon does, too. It will increase its holding. This gives investors indirect exposure to the ever-rising price of Bitcoin.
Unless regulators introduce tough restrictions on mining and the cryptocurrency platform, crypto values will rise steadily. Even if prices fall sharply, MARA stock could fall in sympathy. This will give investors who missed the last big run-up another chance to build a position.
Marathon’s last drop may prove temporary. If the SEC clears any wrongdoing, cryptocurrency investors will rush back to the stock.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.