Riot Blockchain’s Acquisition Changes the Company, but Not Its Outlook

Stock Market

When I last wrote about Riot Blockchain (NASDAQ:RIOT) stock I ultimately left believing it was too risky. Though coin mining operations like Riot Blockchain have the ability to multiply the gains in the already volatile Bitcoin (CCC:BTC-USD), there are many concerns.

Concept art of crypto mining with little figuring and a Bitcoin (BTC) token.

Source: Shutterstock

The hot sector of Bitcoin mining attracts less-than-scrupulous operators, as do all hot sectors. That’s not a knock on Riot Blockchain per se, yet the inherent risk for investors is there. 

Ultimately though, in the case of Riot Blockchain, I came away with the feeling that there simply isn’t enough fundamental evidence that it warrants investor money. Bitcoin is the better investment, and the risk in mining operations is too high in most cases. 

The question now: Does Riot Blockchain’s recent acquisition of Whinstone US, Inc. change anything?

The Acquisition

On April 8, the company signed an agreement to acquire Whinstone outright for $80 million and 11.8 million shares of RIOT stock. That means that Whinstone receives $651 million in implied value based on the price of Riot Blockchain shares and the cash. 

Whinstone operates what it believes to be the largest Bitcoin hosting facility in North America. The facility currently has 300 MW of built-out capacity, and can be developed to 750 MW. 

Now Riot Blockchain is not only a Bitcoin miner, but also a hosting operator for other firms which mine Bitcoin. There are currently three institutional client miners who operate in Whinstone facilities. They are anticipated to be fully utilizing the 300 MW of capacity at the facilities by 2021’s end. Riot will be able to utilize some of that existing capacity for its own operations as well. 

The remaining 450 MW of developable capacity opens many opportunities for both Riot’s own mining and also hosting revenues. 

The diversification is a clear way for Riot Blockchain to de-lever its own strategic risk. Markets didn’t react upon the news, and shares remained flat.  

Riot Blockchain Lacking Confidence?

Any time two companies simultaneously reduce their risk profiles in a deal like this investors need to ask themselves, why? 

On the part of Riot Blockchain, it makes one wonder if the firm lacks confidence in its ability to solely mine Bitcoin. However, Riot Blockchain CEO Jason Les did drop strategic hints a few weeks ago that the company may simply be expanding upon a grander strategy. 

In the company’s year-end earnings release, he first mentioned that Riot Blockchain’s 2020 strategy was one solely focused on mining. 

Regarding future direction, he then stated:

In 2021, we are amplifying our focus on initiatives that will drive further growth for Riot, including increasing the US-based share of the bitcoin mining landscape.”

Investors can guess that Whinstone has a fair amount of confidence in Riot Blockchain given how much stock equity they received as part of the purchase agreement. 

Overall it looks like there is strong potential for this to be a win-win deal with upside growth potential. But does that mean investors should jump into RIOT stock now? 

Is RIOT Stock Worth It Now?

Investors who follow the thinking of the lone analyst currently covering RIOT will say yes. 

That analyst believes RIOT stock is a “buy.” If that prediction pans out, then there’s money to be made on the target price of $64 since RIOT shares are trading around $50. 

The company recorded a net loss per share of $20.03 million in 2019, and $12.7 million in 2020. It is closing the gap in some respect at least. And the company is executing on strategic initiatives including to “Evaluate additional initiatives to decrease costs of bitcoin production.” 

I would say, though, that not much has changed. The deal doesn’t take effect until the second quarter and then results can be measured sometime thereafter. I’d stay away for the time being.

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks.  Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.

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