Summary Q3:22 revenue missed expectations, impacted by lower Bitcoin prices. Bitcoins held on the balance sheet were up 39% to 6,766 BTC as compared to 4,884 BTC at the end of Q4:21. We maintain our BUY rating but lower our target price to $7.00 per share from $12.25. Riot Blockchain, Inc. ( RIOT ): Weaker-Than-Expected Q3; Reduce Price Target Q3:22 revenue missed expectations, impacted by lower Bitcoin (BTC-USD) prices. We maintain our BUY rating but lower our target price to $7.00 per share (earlier $12.25). 52-Week Range Share Outstanding $4.02 – $46.28 167.3 million Total Debt Debt/Equity $0.0 mil 0.0% Insider/Institutional 7.6% /32.5% ROE (LTM) (36.0%) Public Float 153.5 million Book Value/Share $8.4 Market Capitalization $873 million Daily Volume (3 mo. Avg.) 11.8M FYE DEC FY 2021A FY 2022E FY 2023E EPS $() ACTUAL CURRENT PREVIOUS CURRENT PREVIOUS Q1 Mar $1.04A $0.30A $0.30A $0.02E $0.11E Q2 Jun $0.02A $(0.50)A $(0.50)A $0.03E $0.12E Q3 Sep $(0.16)A $0.00A $0.01E $0.03E $0.14E Q4 Dec $(1.18)A $(0.04)E $0.03E $0.04E $0.16E Year* $(0.27)A $(0.23)E $(0.16)E $0.12E $0.53E P/E Ratio NM NM 45.2x Change NM -16.5% NM FYE DEC FY 2021A FY 2022E FY 2023E Revenue $ (mil.) ACTUAL CURRENT PREVIOUS CURRENT PREVIOUS Q1 Mar $27.2A $79.7A $79.7A $71.0E $96.5E Q2 Jun $34.3A $72.9A $72.9A $83.7E $105.4E Q3 Sep $64.8A $46.2A $62.9E $94.1E $116.8E Q4 Dec $86.8A $55.3E $83.5E $105.0E $123.2E Year* $213.2A $254.3E $299.2E $353.9E $442.0E Change 1,665% 19.3% 39.2% Q3:22 Highlights Q3:22 total revenues declined by 28.6% to $46.3 million as compared to $64.8 million in Q3:21 and was down sequentially versus $72.9 million in Q2:22. Mining segment revenues were $22.0 million, down 59% vs. prior year revenues of $53.5 million. Adjusted EBITDA at $0.2 million, compared to $37.5 million in Q3:21. Net loss of $(36.6) million, versus a net loss of $15.3 million in Q3:21. Bitcoins mined were down 19% to 1,042 in Q3:22 as compared to 1,292 in Q3:21. Bitcoins held on the balance sheet were up 39% to 6,766 BTC as compared to 4,884 BTC at the end of Q4:21. RIOT noted that the expansion of its Whinstone facility as well as the new 1 GW facility in Texas is on track. We adjust our estimates based on the quarter end results and management’s commentary. We decrease our target price to $7.00, with an implied capital appreciation potential of 34%. We maintain our rating at Buy. Primary Risks Cryptocurrency mining is largely an unregulated activity; however, it will be a focus for increased regulation in the near- and long-term and the outcome of those regulations is uncertain. Failure to execute on expansion of its facilities. Investment Thesis Riot’s current operating footprint coupled with its planned expansions positions the firm as one of the leading cryptocurrency mining companies in North America. The expansion will increase Riot’s hash capacity to 12.5 EH/s by Q1:23, nearly 2x compared to current capacity which is likely to provide a significant boost to growth beginning 2023 and beyond. The Company has been working towards improving its cost structure as evident by the shift of miners from Coinmint’s facility to Riot’s own facilities in Texas. We believe RIOT offers a unique combination of growth and value within the cryptocurrency mining sector. Summary – Q3:22 Revenues down 28.6% vs. prior year. Q3:22 total revenues declined by 28.6% to $46.3 million as compared to $64.8 million in Q3:21 and were down sequentially versus $72.9 million in Q2:22. The revenue decline was attributed to lower Bitcoin production and decreases in the price of Bitcoin. Mining and Hosting registered declines of 59% and 25%, respectively. Mining segment revenues down 59% YOY to $22.0 million versus prior year revenues of $53.5 million. The increase was due to a lower number of Bitcoins mined (1,042 in Q3:22 vs. 1,292 in Q3:21), partially offset by a 28% drop in Bitcoin price ($21,184 in Q2:22 vs. $41,837 in Q3:21). The decline in the Bitcoin price resulted in lower mining segment margins (61.2% in Q3:22 versus 75.7% in Q3:21). Hashrate capacity up 27% YOY. As of September 30, 2022, the Mining business operated 55,728 miners, with a hash rate capacity of 5.6 exahash per second (EH/s), representing growth of 27% as compared to Q3:21. RIOT anticipates 115,450 miners in operation with a hash rate capacity of 12.5 EH/s by Q1:23. Net loss of $36.6 million , compared to a net loss of $15.3 million in Q3:21. Net loss for Q3:22 was negatively impacted by impairment on Bitcoin, and a decrease in the fair value of power derivative assets. Adjusted EBITDA was $0.2 million during Q3:22 , compared to adjusted EBITDA income of $37.5 million in Q3:21. Strong financial position with $369.8 million in working capital, including $255.0 million in cash on hand, and 6,766 Bitcoin. Bitcoins held on the balance sheet were up 39% compared to 4,884 BTC at the end of Q4:21. Capacity expansion on track. RIOT made substantial progress on the 400 MW expansion at Whinstone. The expansion is expected to be completed in Q1:23. Additionally, the development of a 265-acre 1 GW expansion in Navarro County, Texas which began in Q2:22 is progressing well. The first phase of the expansion comprises 400 MW of Bitcoin mining infrastructure. The mining operations at this facility are expected to commence in Q4:23. Valuation and Recommendation We value RIOT using industry peer companies (a P/S multiple) blended with our Discounted Cash Flow valuation to derive a fair value target price for the Company. We value RIOT using a P/S multiple. We use publicly traded cryptocurrency mining companies as its peers. We value RIOT at 2.5x 2024 sales and then discount that result back at our computed cost of capital. Our multiple is at a premium to the peer group average given RIOT’s position as one of the largest publicly listed Bitcoin mining company in North America. The multiple based target price is $6.64, which discounts back to the present value of $5.99. We weight the other 50% of our target using our Discounted Cash Flow target. Our DCF model uses our forecasted free cash flow to the firm over the next three years and then grows EBIT at a 20% rate over years four and five, 15% over years six and seven, 10% over year eight and 3% thereafter. We apply a weighted average cost of capital of 10.88%. Our DCF produces a value of $7.73. The combination of $5.99 at 50% and $7.73 at 50% results in a weighted average price target of $7.00. The exhibit below summarizes our peer group multiples, while the DCF is included at the end of this report. Thomson Reuters and Singular Research
