Marathon Patent Group (NASDAQ:MARA) stock is one to avoid. At its inception in 2012 it was a patent company founded on a portfolio of three patents and one application. In August 2017 Marathon announced it intended to also pursue potential alternative businesses. Then, in November 2017, it acquired Global Bit Ventures, cementing its current direction as a crypto miner. Since then MARA stock has rattled off three years of successive losses.
Clearly this is a company that is in chaos looking for hope. The chances of it finding that hope look very, very slim. The company’s latest news does, however, leave a slight possibility.
Since Marathon Patent Group pivoted business to cryptomining, MARA stock has seen three distinct peaks. First, at the announcing of its new direction, the stock shot up. It then sharply decreased to around $1 within its first five months of cryptomining. It mostly proceeded to remain under a dollar for the next year.
In April 2019 it enacted a 4-for-1 reverse stock split pushing shares above the NASDAQ’s $1 minimum price listing requirement. Again, Marathon shares ratcheted down to below a dollar and the company was facing NASDAQ listing trouble. The company undertook a series of mining computer purchases, issued stock, and acquired a separate mining company.
These moves, along with recent price appreciation in cryptos, managed to bring shares above $5. They have since retreated to their current price of $2.50.
This clear pattern of boom and quick retreat has defined MARA stock ever since it became a crypto mining company.
Marathon Patent Group has essentially been buying more computers so that they have more capacity to mine. Their business model is relatively simple: hope that you can mine more Bitcoin in value than its costs. Energy costs and computer costs are relatively predictable, Bitcoin much less so.
My InvestorPlace colleague Thomas Yeung laid out the inherent misdirection of Marathon Patent Group’s business plan in his recent article. The previous three years do look like a strategy of taking what hasn’t worked, and then deciding to scale it up. That’s a recipe for increasing losses.
However, there has been news out of the company of late which, if true, could change the fundamental investment attractiveness of MARA stock.
On Aug. 26 the company announced its intent to acquire Fastblock Mining. The company is making some pretty big claims about the fundamental changes this will bring. First, Marathon Patent Group states their current cost to mine one Bitcoin is $7,400. It also contends that upon this deal being consummated, the cost will drop to $3,600 per Bitcoin.
The company claims this steep decrease will result from a lower than industry standard electricity cost of $0.0285 per KwH. And this is where I’m beginning to get suspicious. The Fastblock Mining center is in the Atlanta metropolitan area.
Based on ElectricityLocal.com rates for the Atlanta metro area, this seems wrong. I assume Fastblock Mining is charged under commercial rates which average 9.29 cents/kWh in the area. Even under industrial rates which are stated to start at a low of 4.13 cents/kWh, the company would be nowhere near that 2.85 cents/kWh quoted.
Perhaps I’m missing something here.
Past financial statements raise many, many red flags. This company has not managed to make money with its less than logical business model. I’m also having trouble substantiating even their basic claim of how they intend to decrease their cost structure.
Perhaps I am wrong because there are economies of scale that exist in utilities which can result in significant price reductions. But the only information I’ve been able to find regarding electricity prices that low are for locations in the Central Asian nations of Kazakhstan and Uzbekistan. Again, Fastblock Mining is in the Atlanta metro area, not Central Asia.
The company’s profitability calculations are predicated upon that. They stated a monthly power cost of $1,127,000, leading to revenues of $2.8 million per month. Let’s run some numbers using an average industrial rate of 5.72 cents rather than their 2.85 cent claim.
In that scenario, their monthly power cost jumps to $2,261,191 leading to $1.729 million in monthly revenues. Still not bad, and a significant improvement upon past performance. But what if the company actually qualifies for commercial rates? Then the business model becomes very questionable. At the 9.29 cents per kWh rate the average commercial entity pays in Atlanta, Fastblock Mining incurs $3.67 million in monthly electricity charges on $4 in hypothetical revenues. All other fixed and variable costs are completely disregarded in this scenario as well.
Revenues That High?
Investors really have to ask themselves, where does the stated $4 in monthly revenue really come from? The company had 1.185 million in revenue in all of 2019 from 26,700 sq.ft of operations. Now with 40,000 additional sq.ft, revenues will increase to $48 million annually? The math doesn’t add up, and the assumptions are overly optimistic in the extreme. These are revenues and not profits. They should rise essentially in a linear fashion. But they’ve jumped exponentially while Marathon Patent Groups square footage has increased by 150% (26,700 to 66,700).
I’m operating on a lot of assumptions, but so too is Marathon Patent Group. Given their track record it makes more sense to side with me and avoid this stock.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.