Riot Blockchain Has All Of Its Eggs In A Volatile Bitcoin Basket

Riot Blockchain (NASDAQ:RIOT) emerged from the Memorial Day long weekend, ready to bust out. RIOT stock gained almost 8% on the first day of June.

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Most of the action had to do with positive comments made by two separate analysts about the Bitcoin (CCC:BTC-USD) miner’s acquisition of Whinstone US, North America’s largest Bitcoin mining and hosting facility.

The two analysts believe this deal drives Riot’s share price to $40 or higher in 2021. Here’s why they might be overly enthusiastic.

RIOT Stock and the Whinstone Acquisition

Riot Blockchain closed its acquisition of Whitstone US on May 26. The company paid Northern Data $80 million in cash along with 11.8 million Riot shares. At current prices, that works out to about $425 million.

In return, Riot gets a Bitcoin mining and hosting facility that currently accommodates 300 megawatts (MWs) of power. Riot intends to quickly increase that to the facility’s 750 MW capacity. The facility’s net energy costs are industry-leading, at just 2.5 cents per kilowatt-hour.


“The successful acquisition of Whinstone marks the most significant milestone in Riot’s history, and firmly establishes the Company as a leading Bitcoin mining platform,” Riot CEO Jason Les said in the company’s press release announcing the deal’s completion. “With Whinstone’s preeminent infrastructure and best-in-class construction, development, and operations organization, Riot is extremely well-positioned to increase the scale and scope of its operations.”

As a result of the acquisition, H.C. Wainright analysts upped their target price to $40 — 33% upside from current prices — while B. Riley analysts bumped theirs to $44 based on Riot securing the power necessary to become the leader in Bitcoin mining.

I must be the only one who thinks paying $425 million for a power source is a mistake.

What Business Is Riot In?

It turns out that The Motley Fool’s Rich Smith sees a lot of risk in owning Riot stock at this point, with or without the Whinstone facility.

Smith points out that if Riot earned 36 cents per share in 2021, it would still be trading at an insane price-to-earnings ratio of 81x. And that’s based on the company’s nine-cent profit in the first quarter when Bitcoin prices were trading between $30,000 and $60,000 for the entire quarter.

In fact, BTC traded above $40,000 from Feb. 7 through March 31. Riot finished the quarter with 1,569 Bitcoin and 1 Bitcoin Cash (CCC:BCH-USD) valued at $34.6 million. As of June 2, those coins are worth $58.4 million.

While Riot Blockchain is a cryptocurrency miner, like a gold miner, it makes no money unless it sells its commodity, i.e. Bitcoin.

But unlike a gold operation, which is generally focused on selling all of its production within a reasonable time frame, Riot isn’t in any rush to sell because Bitcoin’s been rapidly appreciating. That makes it an investor.

But this latest acquisition also makes it an owner of infrastructure assets such as data centers and other computer-related activities.

If you look at Northern Data’s investor relations page, you will see that it’s focused on stationary and mobile data centers:

“Northern Data AG develops and operates global infrastructure solutions in the field of High-Performance Computing (HPC). With its customer-specific solutions, the company provides the infrastructure for various HPC applications in areas such as bitcoin mining, blockchain, artificial intelligence, big data analytics, IoT or rendering.”  

I have no idea what it spent developing Whinstone US, but a safe bet would be far less than $425 million.

The Bottom Line

The way I see it, Riot Blockchain is trying to be four different businesses — crypto miner, crypto investor, infrastructure owner and data center operator — all dependent on the price of Bitcoin.

It’s one thing to invest in Bitcoin. It’s another to base your entire business’s future on a single cryptocurrency.

Sure, it might be great news that Riot’s acquired a facility that allows it to mine Bitcoin super cheap. It will be meaningless, however if Bitcoin takes a massive dive.

That’s more than possible.

On the date of publication, Will Ashworth 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.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.