Marathon Patent Group (NASDAQ:MARA) has had an interesting run. A few years ago, the company tried to commercialize intellectual property, as you might guess from its name. However, when that didn’t pan out, Marathon made an abrupt pivot to cryptocurrency mining in 2017. MARA stock briefly soared.
That excitement soon fizzled though. As Bitcoin crashed from $20,000 to as low as $4,000, interest in Marathon and other crypto and blockchain stocks disappeared. Marathon’s shares collapsed from a peak of $23 to less than a dollar.
However, cryptocurrencies are back. Bitcoin has surged above the $10,000 mark again, and many altcoins such as Ethereum and Ripple are also on the move.
Not surprisingly, traders are bidding up some of the crypto stocks in sympathy. For example, Overstock.com (NASDAQ:OSTK) shares are up more than tenfold so far this year.
Many folks are hoping that MARA stock will be the next big crypto winner. However, these wishes will likely be dashed.
Viability and MARA Stock
For all the excitement around the renewed rise in cryptocurrencies, there’s still little evidence that mining it is good business. Well, in North America anyway. Clearly, some mining collectives are doing well, but they’ve generally set up shop in places with cheaper electricity and overhead such as China.
For Marathon, it’s far from certain that there’s a workable business model here.
In Q2 of 2020, the company generated a mere $286,000 of revenues. This was actually a decline from $356,000 of revenues for the same period last year. Not only this is microscopically-small business, it’s also a shrinking one.
What’s worse, its profit margins are imploding. In this quarter of 2019, the company spent $499,000 to produce that $356,000 of cryptocurrency. Pretty bad. However, it got far worse.
This past quarter, Mara spent $740,000 in direct operating costs to produce just $286,000 of revenues. Needless to say, spending three bucks to get back one dollar of cryptocurrency is not a winning strategy.
And this is just the direct costs associated with producing their crypto. It doesn’t include all the other costs associated with being a public company. Once you include employee salaries, consulting fees, administrative costs and so on, Mara managed to lose more than $2.1 million last quarter. Again, it did so while bringing in just $0.3 million of revenues. This isn’t just a bad business, this is a horrendously unprofitable one.
Recently, Marathon announced that it will be buying 10,500 additional mining rigs. This is a bold move, given that Marathon’s current mining operations are massively in the red as is. When you’re losing money, adding more capacity is an odd decision. Generally when you are in a hole, you’re supposed to stop digging.
Regardless, it may still be the right decision. The thing is Marathon is mining such a trivially small amount of crypto now that it would struggle to ever reach profitability. Even if the price of crypto had quadrupled in Q2, Marathon would still have only earned $1 million of revenue and would have had an operating loss of $1 million.
By contrast, any gold mining operation that couldn’t make money if the price of gold went up 300% would be viewed as a terrible investment prospect.
By buying way more mining rigs, at least Marathon will hopefully be able to generate a meaningful sum of revenues that at least cover the company’s employee costs and overhead. And then, if crypto prices go exponential, maybe the company can generate an operating profit.
MARA Stock Verdict
Marathon is not a good investment even if you’re bullish on the future of cryptocurrencies. Since the 2017 peak, for example, the price of Bitcoin has lost roughly 40% of its value. Bitcoin topped out around $20,000 then, and it goes for $12,000 or so now.
Over the same time span, however, MARA stock imploded. Marathon peaked at $23 in 2017 and fell to less than 50 cents per share earlier this year before its recent rebound. Even now, however, with prices around $3, the stock is down nearly 90% while Bitcoin fell just 40%.
With it getting easier and easier to buy Bitcoin either on digital exchanges or via exchange-traded products, there’s no need to own MARA stock. Right now, the company’s mining operation is so tiny that it would require a truly miraculous run in crypto prices merely for the company to break even.
Again, just reflect for a second on the fact that the entire company generated just $286,000 of revenue over the past three month span. That’s far short of what a public company needs to be a reasonable investment.
As such, steer clear of this name. Matt McCall put it nicely: Marathon is a blockchain trap. While the company may look like a key cryptocurrency player, it just hasn’t reached a meaningful scale of operations yet.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.
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